Things Are Spicing Up For Restaurant Stocks

By Joey Fundora | June 03, 2009 AAA

It looks like the death of the restaurant has been greatly exaggerated. Americans aren't ready to give up dining out for frozen pizzas just yet. Yes, restaurant stocks suffered through a drastic drop in share price at the onset of the current bear market, and investors were pricing in outright bankruptcy for many chains. But for all the talk about how strapped the consumer is, it seems like many restaurants have been able to weather the storm and their stock prices have been rising sharply from their March lows.

CEC Entertainment, Inc. (NYSE:CEC), for instance, has risen by more than 250% from its November low of $12.96 to current prices. It had been consolidating in a flag-type pattern for the past few weeks, after rising steadily off the lows. It just recently cleared the flag and is testing the prior high above $37.50. If it can get above this level, it may clear the path for much higher prices.

Source: StockCharts.com

Yum! Brands, Inc. (NYSE:YUM) is another restaurant stock that has risen sharply off its November lows. It cleared a base in mid-April and has been working on another small broadening wedge base for the past month and a half. It is just beginning to emerge from the base and could be in the beginning stages of a new thrust higher. (For further reading, see Sinking Your Teeth Into Restaurant Stocks.)

Source: StockCharts.com

Ruth's Hospitality Group, Inc. (Nasdaq:RUTH) is an example of a stock that may have survived a brush with death. RUTH's stock price plummeted from an established trading range in the low $20s, to an all-time low of 70 cents. Many higher end restaurants were punished even more severely than the low-end and mid-tier chains, as the thought was that consumers would eat at less expensive restaurants rather than forgo eating out altogether. Well, while RUTH is still trading well below its bull market highs, it is well off the lows and trading in a bullish looking flag pattern. Volume is also building, which could be hinting at accumulation.

Source: StockCharts.com

In hindsight, Domino's Pizza, Inc. (NYSE:DPZ) is another example of a restaurant stock that may have been unfairly punished in the market panic last November. DPZ dropped to a low under $3 a share during the autumn selloff last year. After a quick double off the lows, it then spent the next few months building a base in the $5-$7 range. It cleared the base in mid-April, and has been consolidating the break above the base in a bull flag pattern. It is testing the flag at this point, and a close above the $10 mark could lead to a continuation of the April breakout.

Source: StockCharts.com

Many restaurant stocks are exhibiting similar patterns to the above stocks, which may be hinting at a rotation into the sector by institutional money. Others exhibiting a similar pattern include Bob Evans Farms, Inc. (Nasdaq:BOBE), Chipotle Mexican Grill (NYSE:CMG), Darden Restaurants, Inc. (NYSE:DRI)). It is important to track how a stock's sector is performing, as it is always in a trader's best interest to trade in the same direction as institutional money. In this case, it looks like money is flowing into the restaurant stocks, and there are still no signs that it will let up.

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

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