Restaurant Stocks

[MWM]

The Restaurant Stock Bubble of 2011 Could End Badly
by: Rougemont July 6, 2011

Restaurant stocks have been one of the top performing sectors, especially with certain stocks that have become wildly popular. Investors love stocks that go up, just as many loved real estate as it was going up, and the upward trend and lofty valuations could last a little longer. However, there comes a time when it makes sense to sell stocks when they are priced at perfection levels. With the run these stocks have had, and the high PE ratio and other valuation metrics, chances are these stocks will not be able to continue to provide the type of gains they have been for the past couple years.

Investors might want to think seriously about whether these stocks are priced for perfection and therefore could easily drop on any disappointing news. The recent rally seems to be based on nothing more than momentum and short covering, not common sense based on solid valuations. Many of these stocks hit new 52 week highs yesterday, and this sector could be putting in a final speculative "blow off" top right now. You have a combination of highly stretched valuations, a very large amount of insider selling and frothy speculation rampant in these stocks with investors following a momentum-based trend, rather than using common sense. These indicators were present with Internet stocks and real estate just before they plunged. These are the signs you see when major tops are made. I believe many investors buying at these levels will be faced with large losses in most of these names in the next few months.

So far these stocks have defied gravity and some shorts have been badly hurt, however at some point, there is no doubt that these will fall under their own weight sooner or later. The more stretched valuations get in the sector, the more likely this bubble ends badly. These might be great companies with excellent management, but valuation still matters if you want solid returns and to avoid losses on your investments. Investors who paid too much for great companies in the past were often faced with large losses or many years of little to no gains. The stocks below are also overbought based on the relative strength index. I think it makes a lot of sense to follow the executives and directors at most of these companies and cash in while you can:

BJ's Restaurants, Inc. (BJRI) is trading near it's 52 week high of $55.05. The relative strength index is about 81 which indicates these shares are very overbought. These shares have risen from a 52 week low of $21.11 and hit a new 52 week high today. The 50 day moving average is $48.25 and the 200 day moving average is $38.59. The earnings estimates for 2011 are about $1.06 per share, and $1.27 for 2012. This puts the PE ratio at about 50 which is far too rich in my opinion. Insiders have been repeatedly selling shares. See insider selling here.

Chipotle Mexican Grill, Inc. (CMG) is trading around $321.45 per share. The relative strength index is about 78 which indicates these shares are overbought. These shares have risen from a 52 week low of $127.30 and hit a new 52 week high today. The 50 day moving average is $280.56 and the 200 day moving average is $243.98. The earnings estimates for 2011 are about $6.81 per share and $8.44 for 2012. This puts the PE ratio at well over 40 which is high for the restaurant sector. See insider selling here.

Red Robin Gourmet Burgers, Inc. (RRGB) is trading around $37.38. Red Robin is a gourmet burger restaurant based in Colorado. The relative strength index is about 69 which indicates these shares are overbought. The 50 day moving average is $32.57 and the 200 day moving average is $24.63. These shares have traded in a range between $17.03 to $38.58 in the last 52 weeks. RRGB is estimated to earn about $1.47 per share in 2011 and $1.81 in 2012. You can see insiders selling here.

Peets Coffee & Tea, Inc. (PEET) shares are trading at $60.87. PEET is a coffee roaster and operates retail coffee shops. The relative strength index is about 86 which indicates these shares are extremely overbought. The shares have traded in a range between $33.20 to $61.52 in the past 52 weeks. The 50 day moving average is $50.63 and the 200 day moving average is $43.48. Earnings estimates for PEET are just $1.46 per share in 2011, so the PE ratio is about 40. You can see insiders selling here.

Caribou Coffee Company, Inc. (CBOU) shares are trading at $14.01. The relative strength index is about 70 which indicates these shares are overbought. CBOU is a coffee roaster and operates retail coffee shops. The shares have traded in a range between $8.50 to $14.49 in the past 52 weeks. The 50 day moving average is $10.84 and the 200 day moving average is $10.36. Earnings estimates for CBOU are just 38 cents per share in 2011, so the PE ratio is about 36. You can see insiders selling here.

The data is sourced from Yahoo Finance and Stockcharts.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.


http://seekingalpha.com/article/278164-the-restaurant-stock-bubble-of-2011-could-end-badly?source=yahoo