As analysts get bullish on Domino’s, these two fast-food stocks could have even more upside, trader says

Fast-food stocks are having their ups and downs.

Domino’s Pizza was a bright spot on a difficult day for the overall market Thursday after Oppenheimer named the stock its top pick following a meeting with the fast-food operator’s CEO. The firm said current forecasts underestimate Domino’s same-store sales growth through 2021 and flagged what it said was a “medium-term unit growth opportunity.”

Sixty-two percent of Wall Street firms have buy or overweight ratings on Domino’s, according to FactSet.

But while Domino’s shares have made significant strides this year, the rest of the fast-food cohort is all over the map in terms of performance:

To Matt Maley, chief market strategist at Miller Tabak, shares of Domino’s, Chipotle and McDonald’s looked overbought at their current levels. McDonald’s set an all-time high on Wednesday.

“There’s some real reasons to be skeptical about this group, especially because we’re moving into the winter months,” Maley said Thursday on CNBC’s “Trading Nation,” pointing to instances of renewed lockdowns in the Southern Hemisphere when Covid-19 cases reappeared during its winter months.

“I’m a little concerned,” he said. “Having said that, there are two stocks that look pretty good, and if they rally much further, they’re going to get some momentum behind them.”

His first pick was Olive Garden parent Darden Restaurants, down nearly 16.5% year to date.

“The stock has broken above its 200-day moving average,” Maley said, pointing to the chart. “It’s also made a higher high above its June highs. That’s bullish.”

“The problem is it’s only a slight higher high and it’s getting a little overbought,” he said. “Not as much as Chipotle, but getting a little overbought. So the one I like a little bit better is Yum.”

Shares of Yum Brands, which owns KFC, Taco Bell and Pizza Hut, could be on the cusp of another sustained move higher, Maley said.

“It broke its 200-day moving average, it rallied up, came back down and held that 200-day moving average,” he said. “Now it’s starting to rally again. If it can break above its June highs — so, follow that upside break of the 200-day moving average with another higher high — that’s going to give the stock a lot of momentum.”

“Now there’s a lot of ifs in there,” Maley added. “We do need some more upside momentum in these names. But if … [this group] does get some upside, those are the two stocks you want to look at rather than a Chipotle, which has already had a huge move.”

John Petrides, a portfolio manager in the wealth management division of Tocqueville Asset Management, is staying away from fast-food stocks altogether.

“I’m a believer of avoiding this entire space in general,” he said in the same “Trading Nation” interview. “I don’t have to go to Domino’s to buy pizza. I can go to my local place. Or I can go to my local Tito’s Burrito’s … where I live, or I can make my own lunch. So, I don’t need to go to these places to order food.”

Moreover, while the coronavirus pandemic has put more pressure on restaurants than almost any other industry, there’s been a significant silver lining for the group, Petrides said.

In a way, restaurants have become “more competitive” because they were forced to embrace things like curbside pickup and mobile delivery apps in a way they hadn’t before, the wealth manager said.

“So, … your local restaurant now becomes, in essence, a fast-food type of caliber where you get that service to your door,” he said.

But Petrides is concerned about the stocks’ valuations.

“By and large, the group is trading at about a 50, 60, even 70% premium to the S&P 500, and I’m just not willing to pay up for that,” he said. “I think the benefit of Covid to the quick-serve space is very much baked into the price, and for those reasons, I would avoid the space entirely.”

Shares of Darden fell nearly 1.5% on Thursday. Yum! Brands’ stock closed about 1% lower.


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