Tasty Food-Chain Growth

So the restaurant stocks are getting sold off in this part of the market rally. Does this mean we should leave this sector along the side of the highway for dead? I think not.

The LakeView Restaurant and Food Chain Index, which I publish in conjunction with my newsletter has risen 11.76% this year (a pure Restaurant Index will be unveiled on July 1). Just as the Nasdaq Composite Index, which rose 18.09% so far this year, is pausing, I believe the entire food chain is taking a rest. This group was a market leader for part of the rally and is just now the anointed segment to take profits. The technicals got ahead of the fundamentals and now they are just equalizing.

What do the fundamentals tell me about the sector that continues to make me bullish? Here are a few reasons:

1. According to the May advance retail sales report, food and beverage stores sales rose 0.4% for May and 0.6% year over year, while food service and drinking places sales rose 0.2% in May and 1.25 from a year earlier. Sales rose for the past two months in the latter category.

2. Same-store sales have improved steadily during the course of the year.

3. Commodity costs, particularly in food (with the exception of soybeans and corn) have come down from peak levels and remain relatively weak vs. last year. As those peak costs are getting annualized, higher menu prices remain in place helping to drive margin growth.

4. Contraction in the industry is pushing out marginal players (many of which are privately owned and operated) leaving more for the stronger public operators. Remember what happened to Best Buy (BBY - commentary - Trade Now) and Bed Bath & Beyond (BBBY - commentary - Trade Now) after the demise of Circuit City and Linens 'n Things.

5. The dollar is weakening once again. Multinationals such as McDonald's (MCD - commentary - Trade Now), Yum! Brands (YUM - commentary - Trade Now), Kraft (KFT - commentary - Trade Now) and Kellogg (K - commentary - Trade Now) will all benefit after six months in dollar hell.

I think the event that helped to start the profit-taking in the group was last week's McDonald's sales report which was a little disappointing, albeit positive. Something usually is the impetus for a direction change and this time they tagged the fast-food chain as being the culprit.

Restaurants, grocers and retailers are a little busier. The change is restrained but as I explained earlier in the week, you often notice change over longer periods of time because it is less subtle.

If you're a trader and are looking for some momentum, the food and restaurant stocks could be a short-term bearish meal ticket. As an investor, you will soon get some excellent long-term value and growth opportunities across the entire food chain.

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At the time of publication, Rothbort was long McDonald's and Yum! Brands, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site TheFinanceProfessor.com.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.