Zacks Analyst: Take A Look At Food Stocks

While most eyes are glued to the expanding tech sector, Tracey Ryniec, a stock strategist at Zacks investment research firm, is taking a discreet peak at the all-but-forgotten dining stocks.

“The consumer, as long as the job market does well, will be eating out,” Ryniec said Monday on Benzinga’s Pre-Market Prep radio show. “I’m kind of snooping around the restaurant chains now because a lot of them have come off their highs from what I consider to be the restaurant bubble of a couple years ago, and now you’re starting to get some good valuations.”

Pizza Or Burgers?

Among the perceived deals is Domino’s Pizza, Inc. DPZ, which is trading down about 12 percent off all-time highs hit in June.

“Domino’s is what I consider to be the king of the restaurants right now, even overtaking McDonald’s Corporation MCD, because it’s the only restaurant chain that's doing double digit comps still,” she said. “[It] probably won’t be doing it for much longer because it’s really hard to do year over year even with the growth that they have, but the Domino’s chart is crazy.”

With the four biggest pizza chains controlling only about a quarter of the U.S. pizza market and “mom and pop” shops seizing the rest, Ryniec sees room for growth in the space.

“I still like the pizza chains even at this level,” she said, noting the same for McDonald’s and fellow “old-line, big-name” burger chains, such as Wendys Co WEN and Restaurant Brands International Inc QSR’s Burger King. McDonald’s hit all-time highs in July, Wendy’s in May and Restaurant Brands in June.

Wanna Hear The Specials?

She has less confidence in the likes of Potbelly Corp PBPB and Shake Shack Inc SHAK, which linger around all-time lows.

Although browsing for buying opportunities among these stocks, particularly eyeing the $4 Noodles & Co NDLS as it trades well below its 2013 rate of $45, Ryniec questions whether some of these firms will survive existing conditions.

“You do have to look at the competitive landscape to see who could be in it for the long-haul and who could be the next McDonald’s,” she said, noting challenges among burger chains amid proliferating competition.

Still, the outlook is generally favorable. “As long as the U.S. economy stays well, I like most of these restaurant chains.”

The Healthy Alternative

Dining isn’t the only food category in which Ryniec sees value. Recently, she’s made positive calls on Weight Watchers International, Inc. WTW, which has run up 324 percent year to date.

Although considering the stock fully valued at its present $48.50 rate, Ryniec is encouraged by the company’s 20-percent comps in last quarter’s off-diet season. Similar results at NutriSystem Inc. NTRI suggest promising activity in the wellness category and a growing trend toward dieting, she said.

The Earnings Season

These and other aforementioned food stocks, including McDonald’s and Domino’s, reported massive earnings beats last month, which reflect what Ryniec called one of the best quarters the market’s seen in five or six years.

With earnings up about 10.5 percent year over year for reported S&P 500 companies, “the only fly in the ointment is possibly the small caps,” she said, noting that their numbers aren’t as strong. “They probably need a little bit of help here with maybe some tax reform and maybe even infrastructure to give them a little more of a boost.”

“When that improves further, then we’re going to see a really strong U.S. domestic economy.”

You can listen to our full interview with Ryniec starting at 34:35 in the track below.

PreMarket Prep is a daily trading show that airs every morning from 8–9 a.m. ET here and on our YouTube Channel. You can also listen to the podcast on iTunes, SoundCloud and Stitcher.