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Value Investor

Aug 16, 2017

Please pick a time stamped topic below:

(0:30) - Stock Sell Off: Buying Opportunity or Value Trap?

(2:35) - Beat Down Restaurant Stocks

(4:10) - Stock Screener To Avoid Value Traps

(5:15) - Tracey's Top Stock Picks

(10:15) - Value & Growth Restaurant Stocks

(12:45) - Episode Roundup:

 Welcome to Episode #55 of the Value Investor Podcast

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio service, shares some of her top value investing tips and stock picks.

In 2013 and 2014 more than a dozen restaurant companies went IPO to great fanfare. The stocks were bid up as investors bought into the growth plans of many of the regional chains.

But in 2017, these companies were hit with a new reality of rising costs, especially in labor and food, along with a competitive landscape.

The restaurant bubble has popped. Many of the restaurant stocks are down double digits for the year.

Do New Lows = Value?

Consider Noodles & Company (NDLS). Shares are down 44% year-to-date and are trading at new all-time lows.

After it’s 2013 IPO, shares were as high as $45. They’re now trading under $5.

It’s not expected to be profitable this year as the 2017 estimate is calling for a loss of $0.01.

Is this a value stock or a value trap?

Definition of a Value Trap

Remember, a value trap can look a lot like a value stock. It might have a low P/E or P/B ratio. Shares may be hitting new lows. It might be in an industry getting the cold shoulder from Wall Street.

But a value stock will also have solid earnings, which are on the rise. A value trap will have declining earnings.

Tracey took a look to see if her favorite restaurant chains were a buying opportunity yet. She ran a screen that included just the restaurant industry and stocks with a P/E under 15.

There are 79 restaurant chains in Zacks “retail-restaurants” category.

Only 6 names came up which indicates that the industry is still “expensive” even with the stocks pulling back.

3 Restaurant Stocks: Are They a Value Stock or a Value Trap?

  1. Brinker International (EAT) operates Chili’s and Maggiano’s Little Italy. Shares are down 35% year-to-date. Brinker’s forward P/E is just 10.8 but what do the earnings estimates look like? Are they rising?
  2. Dine Equity (DIN) operates IHOP and Applebee’s. Second quarter was rough as it announced it was going to close between 105-135 Applebee’s and 20-25 IHOPs. Shares are down 47% year-t0-date. It has a forward P/E of 8.6. Is it a value stock or a value trap?
  3. Bojangles (BOJA), the southeast regional fried chicken chain, saw lower same-store-sales last quarter. Shares have fallen 19% year-to-date and it now trades with a forward P/E of 16.3. Is this a buying opportunity?

Tracey also took a look at other restaurant companies that don’t yet have value fundamentals but whose shares are weak.

Chipotle (CMG), for instance, is now trading at a 4-year low. Shares are down 32% in the last 3 months.

It currently trades with a forward P/E of 41 so it’s nowhere close to being a value even with the stock sell off.

But would it be a trap?

The key is those earnings estimates. Are they being cut or is the growth there for investors to keep it on their short list?

Find out the answer to this and more on this week’s podcast.

Want more value investing insights from Tracey?

Value investors are a special breed of investor. They don’t follow the herd.

If that is your style of investing, be sure to check out Tracey’s weekly Value Investor service to receive more in-depth analysis on value companies and see which stocks she thinks are the best bargains now.

The Value Investor portfolio holds between 20 and 25 value stocks for the long haul.

Click here to learn more>>>