If restaurants weren’t hit hard enough during the pandemic, some of them are struggling to find their footing as food prices soar. If that wasn’t bad enough, the industry is facing a worker shortage which is causing them to spend more to retain and attract new talent. Add in supply chain issues and you have a triple threat. Restaurants are left with passing on those additional costs to customers and customers are not having it.
Yes, pandemic exhaustion was supposed to bring people back out to restaurants and bars and everything was supposed to be right in the world once again. One bright spot though is the pandemic forced many to eat at home, and meal-kit delivery services became more popular during 2020. People became much more accustomed to ordering take-out and those restaurants without e-commerce suffered.
That brings us to today:
There’s one stock that was flying high that you should stay away from and another stock that is profiting from its demise.
Check out today’s pairs trade idea as we put a Consumer Cyclical stock against a Consumer Defensive stock.
Wingstop (WING) was flying high during 2020 and 2021, rising in share price up to over $175. They couldn’t keep up with rising chicken prices, shortage of workers and all of the things already mentioned. First quarter profit and revenue missed expectations and same-store sales only slightly increased by 1.2% even though a 5% increase was expected.
The industry is facing a tough road ahead for another three to six months and while some stocks may be able to buck the overall trend of the market and the trend of its industry, Wingstop is still overvalued within its industry, sitting on a P/E ratio of 65.90. It’s trading below its 50 day and 200 day moving average and seems to be in a freefall.
Prices continue to make new lows as it currently sits around $79 and recently broke through a long-term support level.
I mentioned a pairs trade, so while inflation does continue to hit food prices across the board, people still need to eat. They just don’t have to go out to do so.
Kroger (KR) operates a chain of grocery stores and continues to return value back to shareholders in the form of a 1.56% annual dividend as well as share buybacks. Kroger is trading at a higher P/E ratio of 24.68, but with a forward P/E ratio of 13.55. They are expecting continued growth over the next five years and can even beat prices of some of the megastores.
While Kroger did hit a recent peak in the beginning of April, I’d look for a fresh cross of a 3 and 8 period moving average for a chance to get back into a stock that will continue to be a necessity, no matter what the latest inflation readings say.
If you have any questions, comments, or anything we can help with, reach us at any time.
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