The Wendy's Company (WEN) launched a "quick service" breakfast menu in March, at the height of the pandemic shutdown, in a direct challenge to McDonald's Corporation's (MCD) wildly successful all-day breakfast initiative. Wendy's had failed several well-publicized attempts to build market share to that point, generating lots of skepticism on Wall Street. However, the new venture is now booking an impressive 8% of system-wide sales.
- Wendy's is outperforming the stocks of other hamburger chains.
- Price action has completed a multi-decade breakout pattern.
- A "second wave" this fall and winter could undermine a breakout.
Investors and traders have taken note, lifting the stock in a dramatic V-shaped recovery wave that reached the February 2020 high in June. No other hamburger-centric fast food chain has accomplished this task, elevating Wendy's stock into a position of market leadership after many years of laggard behavior. In turn, this bodes well for higher prices after Wednesday's pre-market earnings release, with the potential for a breakout to an all-time high.
Wall Street consensus remains cautious, with a "Moderate Buy" rating that is based upon 11 "Buy," 12 "Hold," and 1 "Sell" recommendation. Price targets currently range from a low of $12 to a Street-high $28, while the stock will open Tuesday's session right at the $23 median target. Given this placement, look for upgrades and higher targets if the company exceeds earnings expectations and/or breakfast sales show healthy growth.
A laggard is a stock or security that is underperforming relative to its benchmark or peers. A laggard will have lower-than-average returns compared to the market. A laggard is the opposite of a leader.
Wendy's Long-Term Chart (1993 – 2020)
A multi-year uptrend topped out at $9.72 in 1993, marking a high that wasn't challenged until a 2003 breakout and uptrend that ended at $22.42 in 2007. Keep that level in mind because it has come back into play in 2020. The stock plunged during the 2008 economic collapse, settling at a 17-year low in the single digits in November. A weak bounce stalled above $5.00 in the first quarter of 2009, yielding a higher long-term low in 2012.
A shallow multi-legged uptrend finally completed a 100% retracement into the 2007 high in September 2019, yielding sideways action into a February 2020 breakout attempt that failed after adding less than two points. The stock got clobbered during the pandemic swoon, dropping an astounding 71% in just four weeks. The V-shaped recovery wave took a bit longer, completing the round trip in just under 12 weeks.
A V-shaped recovery is a type of technical pattern that resembles a "V" shape. It unfolds as a sharp rise back to a previous peak after a sharp decline in security prices.
Wendy's Short-Term Chart (2018 – 2020)
The on-balance volume (OBV) accumulation-distribution indicator broke out above the June 2015 high in March 2018 and has carved an impressive string of higher highs in the past two-plus years. A distribution wave in the first quarter of 2020 got bought aggressively in the second quarter, yielding another string of new highs, starting in May. This positive action predicts that price will eventually follow suit, raising the odds for a major breakout.
Still, it's tough to buy the stocks of hamburger chains, with COVID-19 seating restrictions and beef shortages undermining quarterly profit growth. Taking the plunge requires an act of faith to some extent because a "second wave" of the pandemic this fall and winter could trigger a broad-based decline that causes sleepless nights for new shareholders. This is especially true given the stock's volatile history and high-percentage losses posted in the first quarter.
The Bottom Line
Wendy's stock is outperforming its peers by a wide margin, returning to the 2020 high and completing a multi-decade breakout pattern that predicts much higher prices.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.