Value Deals in Restaurant Stocks

NEW YORK (TheStreet) -- We've officially hit the dog days of summer. We can't seem to get more than a two- or three-day reprieve from the heat, and Mr. Market has continued his erratic behavior.

I expected a roller-coaster ride in the markets this summer, but admittedly that call did not take the intelligence of a brain surgeon. In the six weeks since my piece on that very subject ran on TheStreet.com, we've certainly seen volatility.

In fact, during the 34 trading days since my piece ran there have been 10 days that the Standard & Poor's 500 has moved up or down at least 1%. Interestingly, six of the 10 days have had positive closes, and during that stretch the S&P was up 4.1%. It looked for a while as though Tuesday would be the eleventh day, but the S&P "recovered" to finish down 0.9% on the day.

While I don't spend a lot of time worrying about the gyrations of the broad markets, I do find the volatility fascinating.

What's more fascinating, however, are some of the earnings numbers that are coming out this week. I've focused a lot of energy on restaurant names the past few years because I've found value in some of those names.

Overall, the sector has done very well, which has been the historic norm as we've exited recessions. While I do have many concerns about the current state of the economy, I look to restaurant results for clues as to how consumers are actually feeling.

On Tuesday Domino's Pizza (DPZ)DPZDPZDPZ announced decent second-quarter results. While revenue slipped 2.3% to $376.1 million, missing the $387 million consensus estimate, earnings per share came in at 47 cents, 1 cent ahead of estimates. Shares had slipped following disappointing first-quarter results, and until then the stock had been on fire since late 2009.

That's when Domino's rolled out one of the greatest restaurant advertising campaigns in history; announcing changes to its pizza recipe following the admission that its product quality had fallen short of customer expectations. This was a brilliant way to re-engage customers, and others such as Wendy's (WEN)WENWENWEN should have taken a page from Domino's book.

Another restaurant heavyweight, Panera Bread (PNRA)PNRAPNRAPNRA, put up a great quarter, with earnings coming in at $1.50 per share, 7 cents ahead of estimates. Revenue rose nearly 18% to $530.6 million, and same-store sales were up 7.1%.

Buffalo Wild Wings (BWLD)BWLDBWLDBWLD, however, is suffering the wrath of the market after reporting earnings of 62 cents, 6 cents below the consensus estimate. Chipoltle's (CMG)CMGCMGCMG meltdown last week was a long time coming. This name has been putting up great results, but growth expectations have simply been too high.

Overall, restaurants are hanging tough, in my opinion, and consumers are not shying away, yet. That's despite the specter of rising commodity costs, and consumers who are said to be hunkering down.

As a value investor, I've typically taken positions in "second-tier" restaurant names, those that have faced challenges but have compelling assets, in my opinion, and are attempting to turn around.

A couple of examples include Ruby Tuesday (RT)RTRTRT, which reports after the market close Wednesday, and Denny's (DENN)DENNDENNDENN, which reports on July 31.

I'm also anticipating Biglari Holdings' (BH)BHBHBH Aug. 13 release. Biglari Holdings is the parent company of fast-food chain Steak n Shake, and also owns a 17.3% stake in Cracker Barrel (CBRL)CBRLCBRLCBRL, a former holding of mine, (and my favorite chain).

Keep an eye on how restaurants are doing. Consumer sentiment surveys are often flawed, in my opinion. I'm more interested in how consumers actually behave than their responses to survey questions.

At the time of publication the author had positions in DENN, RT and BH.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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