Traders Showing An Appetite For Restaurant Stocks

By Joey Fundora | March 29, 2011 AAA

One group that was hit really hard during the financial crisis and the resulting bear market was the restaurant sector. With so many consumers losing their jobs and their homes, market participants braced for the worst and priced in a scenario where consumers would avoid eating out at all costs. However, this group rebounded far earlier than anyone expected and many stocks are back to or near all-time highs.

Chipotle Mexican Grill (NYSE:CMG) may not be a fair example to highlight for trading at all-time highs; after all, it only started trading near the tail-end of the prior bull market. Nevertheless, even its prior parent company, McDonald's Corporation (NYSE:MCD), is close to all-time highs. CMG rallied very strongly toward the end of 2010 and has been consolidating those gains for the past few months. While the breakout attempt in February was pretty strong as well, the resulting price action would still be characterized as part of the larger consolidation. However, CMG is now attempting to clear the $260 level, which has been an important area of resistance. If CMG can get above the congestion in this area, it could very well head to new all-time highs.

Source: StockCharts.com



BJ's Restaurants (Nasdaq:BJRI) is another restaurant stock trading near all-time highs. BJRI successfully cleared long-term resistance near $28 last November, and has been quietly consolidating since then. The chart structure is shaping up nicely as BJRI continues to see progressively higher lows. The $39 level has been blocking all advances so far, resulting in an ascending triangle pattern, which has persisted for several months. This pattern is typically a continuation pattern and with BJRI near the apex of the triangle, it could be ready to attempt a breakout very soon.

Source: StockCharts.com



Yum! Brands (NYSE:YUM ) is also flirting with an end to a recent consolidation. YUM has been in a sideways range since last November and is currently near the top of that range. Looking closer, YUM had been trading in a tighter channel within the consolidation from November through February before a false breakdown late in February. YUM then gapped above the top of the channel and completely changed the character of the stock. Traders should keep a close eye on the $53 level; a push above this could take YUM to all-time highs. (For more, see Track Stock Prices With Trendlines.)

Source: StockCharts.com



While Denny's Corporation (Nasdaq:DENN ) is not near all-time highs, the stock has also been participating in the recent strength percolating through the restaurant stocks. DENN already cleared the consolidation that began last November, although it ended up settling into a second tight consolidation above its prior base. DENN is now attempting to break out of this "base on base" pattern and could continue to rally above $4.25.

Source: StockCharts.com



The Bottom Line
Traders should certainly keep their eyes on this group. Not only was it one of the strongest groups over the past year, it is also coming off a healthy consolidation of several months. Stocks breaking out from long and healthy bases often suffer fewer failures. With so many of these stocks sitting just under all-time highs, it's possible that a breakout would have good follow through. While consumers have certainly been faced with tightening wallets, their appetite for restaurant foods persists. (For more, see Sinking Your Teeth Into Restaurant Stocks.)

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

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