A basket of restaurant stocks got a shot in the arm Monday after a private investor group bought the Arby's chain from the chronically underperforming Wendy's/Arby's Group (WEN) - Get Report. This long-anticipated transaction should encourage a wave of speculation in the weaker industry players, although the group as a whole will remain vulnerable to a slowing economic environment.
That's especially true at the top end of the capitalization spectrum, where currency fluctuations and rising food costs have buffeted fast food giants
. As I noted in a
recent column, McDonald's could easily sell off into the mid-$70s in coming weeks, after hitting an all-time high of $83.08 in May.
It's also a good time to avoid specialty eateries, which often show resilience in tough economic times due to loyal customers and favorable demographics.
Chipotle Mexican Grill
certainly fits this category, even though the sector leader has been holding up relatively well at the moment. Unfortunately, the chain isn't bulletproof and is likely to follow the market to lower ground.
Buffalo Wild Wings
is my single exception in the specialty category because chicken prices are lower than they were a year ago, allowing the company to avoid the commodity inflation that's undermining profits at its competitors. But as you can see from the chart below, the stock has been falling in lockstep with the major indices, reflecting the negative impact of a slowing economy.
I'd still recommend keeping close tabs in coming weeks because the stock could easily turn higher and resume its long-held role as a market and sector leader. The first signal that better times are ahead will arrive with a rally that lifts the price back into the range of the triple-top pattern (blue line) that broke to the downside on June 3. That will take a sustained uptick over $60.50.
Wendy's/Arby's disclosed in January that it was trying to sell Arby's, triggering a strong volume surge that has, so far at least, failed to translate into higher prices. The stock rallied on the acquisition news but ran immediately into a buzzsaw of selling pressure, dropping the price back toward the unchanged level by Monday's closing bell.
But the first-quarter buying surge has set up a strongly bullish On Balance Volume (OBV) divergence that predicts an eventual run toward $7 or $8. Given tough market conditions, there's no rush to get long right here. Instead, pull up a chair and wait for the stock to clear strong resistance between $5.20 and $5.40 (red lines).
Ruth's Hospitality Group
was the biggest winner in Monday's impulse buying, breaking out above a six-month basing pattern at $5.50 and hitting a 52-week high. The first rally target lies at $6.60, where the stock topped out in April 2010. There should be at least one buyable dip before the uptrend extends to the upside, with a decline into the $5.20 to $5.40 zone offering a low-risk buying opportunity.
In addition to buyout speculation, this eatery has the added benefit of catering to high-end customers. These folks haven't been hurt by the economic slowdown, at least in the way that affects most pocketbook issues, so their eating and buying habits haven't changed all that much. It's the same dynamic that has made jewelry giant
Tiffany & Co.
one of the strongest performing retail stocks of 2011.
is also finding buyers, bouncing strongly after a two-week downdraft. This company treads the same demographic waters as Wendy's/Arby's, with high market saturation and slowing growth. It's been a poor performer in the last few years, dropping into an ascending triangle pattern that's been in place since September 2008.
Pattern resistance roughly aligns with the 200-week moving average at $12.12. The stock bounced at the 50-week moving average on Monday and is now trying to build a base in the high single digits. Weekly relative strength is rising, despite the recent decline, suggesting the stock will continue to attract shareholders and set up a key test this summer at the top of the triangle.
Monday's acquisition news also ended a two-week decline in
Jack in the Box
. Like Sonic, this stock has dropped into a major holding pattern since the bear market ended. Unlike its rival, it's had a tough time finding steady buying interest, despite one of the funniest marketing campaigns in the restaurant business.
Weekly price action shows a massive symmetrical triangle, with resistance at $24 and support at $20. The stock dropped to within $0.50 of support last week, with Monday's bounce giving it a much-needed reprieve from selling pressure. My advice here is the same as Sonic: watch the boundaries of the multiyear basing pattern and get long if there's a breakout.
At the time of publication, Farley was long RUTH, although holdings can change at any time.
Alan Farley is a private trader and publisher of
Hard Right Edge
, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of
, a premium product from TheStreet.com that outlines his charts and analysis. Farley has also been featured in
. He has written two books:
, due out in April. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
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