Quantitative Easing

3 restaurant stocks to buy as stocks struggle with events

There are very few optimistic investment experts out there, so let me brighten your day. I continue to believe that the indices can reach new highs this year. The struggle between buyers and sellers is now unequal. The bears have a slew of tailwinds and they still can’t kill this bull. Markets rose 3% on Wednesday ahead of a potentially disastrous inflation report today. Last week the S&P500 and the Dow were flat despite fears of war. Therefore, I should continue to find cheap stocks among the rubble of this correction. Today we discuss three restaurant stocks to buy that offer compelling storylines.

I am optimistic but reckless. Nothing I do with stocks now comes with full conviction. The problems plaguing the world are incredibly serious and investors should respect that fact. So when I initiate a new risk, it should be at most a starting position. And I would avoid adding to the current positions, because the lower average only makes the problems worse. To do so when we have no new risk information is stupid.

The greatest threat to stocks is also a threat to humans. The situation in Ukraine continues. World leaders are trying to coerce Russia into stopping its violation. But so far, the pressure has failed to deter them. Until that happens, stock markets are likely to be headline news when disaster strikes.

Another nagging problem comes from the Federal Reserve. They announced their intention to end quantitative easing this month and start raising rates. It’s about fighting inflation, which is clearly on fire. For over a year they told us it was “transitional” and apparently now it’s panic-worthy.

I bet they won’t hike as much as the experts predict. Nevertheless, the threat of extremely tight monetary conditions persists. Meanwhile, we continue to do our homework to find stocks at great prices.

Here are today’s three restaurant stocks to buy this month:

  • McDonald’s (NYSE:MCD)
  • Chipotle (NYSE:GCM)
  • Starbucks (NASDAQ:SBUX)

Restaurant Stocks to Buy: McDonald’s (MCD)

Source: Charts from TradingView

The invasion of Ukraine is devastating for the people who live there. Western governments are threatening Russia with consequences if they do not back down. Companies are too. Yesterday we learned that McDonald’s and Coke (NYSE:KO) cut off Russia from their products and services. This is the kind of fight I prefer to one that costs human lives.

Although this caused MCD’s stock to fall, it does so within past support levels. Approaching $220 per share, more investors should be interested in owning it. The support zone extends another $20 lower, so it’s not a hard line in the sand.

Nonetheless, this is now a fundamentally and technically compelling bullish argument for the long term. Since we have so many extrinsic factors, however, investors should only take partial positions to begin with.

Arguably, this stock market debacle began on February 24. When MCD lost support, the downside target was a self-fulfilling prophecy. As markets rebounded that day, MCD stock triggered a head and shoulders drop that was aimed at $225. Sure enough, what followed was exactly a correction of that destination.

The fall was quite severe and cut a lot of support. I would have expected more buyers to show up around $230 per share. However, these are unusual times, so there are no guarantees.

Basically, there is nothing wrong with MCD except for temporary interruptions. The estimated impact of Russia’s leg is around 5% on its finances, so it’s not an insurmountable challenge. The company has been around for ages and I’m confident it will navigate warm waters well. Especially since they have in fact planned their actions and are in control.

The business income statement is somewhat boring, but that’s the selling point. There is no financial precipice they jumped over to cause this correction. Moreover, it is not expensive, so boring finances mean the absence of special bearish circumstances.

They are generating $9 billion in cash from their operations, so they can survive this Russian situation. Meanwhile, MCD nearly 20% below its highs is worth investigating, especially for new positions. I’m not a fan of averaging unless the initial position is partial to begin with.

Chipotle (CMG)

Restaurant stocks to buy: Chipotle (CMG) stock chart showing potential basis

Source: Charts from TradingView

In the restaurant industry, Chipotle is the technological forefront to pursue. If McDonald’s is the Apple (NASDAQ:AAPL) of restaurants, then CMG is the Amazon (NASDAQ:AMZN) of the group.

I have long analyzed restaurant finances and what CMG does is absolutely amazing. For a long time, they have been criticized for their valuation. However, they generally earned it by delivering stellar compositions. This is why the title is so volatile, as it has extreme fans and haters at odds. Each group presents strong arguments, but somewhere in the middle lies the truth. Management has earned all the kudos it needs to lure buyers into a declining stock.

Recently, Chipotle’s stock has fallen on hard times. After hitting an all-time high last September, CMG stock has lost up to 35% of its value. This is where he will find support but with a huge caveat of risk. If it breaks below this week’s low, it could trigger another giant drop below $1,000 per share. Although not my prediction, it is too close to the current price to ignore. Therefore, suggesting bullish positions here should come with two caveats.

The first is to only take partial positions leaving room to add in case the crash occurs. The second is to set a stop loss to make this entry more tactical than fundamental technological. The reason I fear the support below is that the downside target would become a self-fulfilling prophecy. We’ve seen it happen at MCD, so the trading algos are chasing it here too. This would also be a bearish head and shoulders pattern and they are quite reliable.

Basically, there is absolutely nothing wrong with the company. Revenues are now nearly 60% higher than five years ago. Additionally, management is now operating with a net income position of $650. Statistically, this stock has never been cheap, but at this point, it’s not expensive either.

For a growing company, having a price/earnings ratio of 57 is not so strange. This is especially true if the price to sales ratio is below 5. CMG stock owners here are being realistic with their expectations. It’s also important to note that Chipotle has $1.5 billion in net operating cash flow from its own operations. So they have all the ammunition they need to continue growing even if borrowing costs increase due to rate hikes.

Restaurant inventory to buy: Starbucks (SBUX)

Restaurant stocks to buy: Starbucks (SBUX) stock chart showing potential basis

Source: Charts from TradingView

Starbucks stock has also fallen more than 30% from its July highs. This has also reached a level that should attract potential buyers. There is technical support for SBUX shares below $84 per share.

Given that the fall from grace was so quick, investors shouldn’t expect a hardline bounce. Think of it as a cushion, so it can still fall further. Coming down from the top to here was easy. However, falling much further from here will be more difficult. This company rarely makes mistakes and when they do, they correct them quickly. Therefore, if the stock market stabilizes, I expect SBUX to rebound.

Bulls need to know that the sellers are in control until proven otherwise. The first step for them this week and the next is to hold more than $84 per share. Otherwise, I expect the sale to continue for another 5% less. The rebound rally may occur over the next two months, and it will encounter resistance. There will be sellers hiding if they can get to $96 per share. More of the same will be close to $105 per share.

Bullish investors should also realize that the upside potential is no moon. I would be a fan of selling bullish put option spreads to generate income. These are strategies that don’t need rallies to win, and they leave room for error.

Buyers of SBUX stock should consider deploying only partial positions and staying tactical. This means that I would be ready to register profits much faster than normal. The days of buy and hold are over and everyone has to be a little trader now.

SBUX also generates a lot of cash from operations, so funding is not an issue in a rising rate environment. Unlike McDonald’s, its P&L isn’t boring. Starbucks’ revenues are now 24% higher than in 2018. They even generate $4.4 billion in net income. This leadership team gets it right and overcomes challenges.

The pandemic shutdown for all three companies was as tough a test as it gets. All three passed with flying colors.

At the date of publication, Nicolas Chahine had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.

Nicolas Chahine is the Managing Director of SellSpreads.com.