Fast food, big potential?
With Goldman Sachs issuing bullish calls in the fast-food and restaurant space on Tuesday, two traders assessed whether the firm’s picks could continue to deliver gains in the year ahead.
Goldman analysts named the stock of Chipotle Mexican Grill as their top pick in the space for 2021, also assigning buy ratings to Domino’s Pizza, McDonald’s, Starbucks, Jack in the Box, Darden Restaurants, Brinker International and Wingstop.
Investors should look no further than one trio of stocks dominating the group, Boris Schlossberg, managing director of FX strategy at BK Asset Management, told CNBC’s “Trading Nation” on Tuesday.
“You really can’t go wrong with Domino’s, Mickey D’s and Starbucks,” he said, using a popular nickname for McDonald’s. “They’re the trifecta in this space, simply because all these names have totally mastered the art of automation of the food experience, the fast-food experience, and they’ve basically disseminated all human error out of the process.”
All three have “huge economies of scale,” which Domino’s leverages for its logistical prowess, McDonald’s uses to streamline ordering and test new items such as meatless burgers, and Starbucks employs via its app, which makes the company millions of dollars in revenue, Schlossberg said.
“To me, all the movement here is very much forward,” he said, adding that a logical next step for Domino’s might be to make an acquisition in the gourmet pizza space and “keep the upmarket brand completely separate” while enhancing it with its technology.
“To me, all of these players are essentially dominating this space very strongly, and because of the economies of scale and because of their perfection of the buy online, purchase in store, the BOPUS … it’s a very, very good process that I think is going to reward investors very well in the near future.”
Few parts of the restaurant industry have felt the impact of Covid-19 like small businesses, Todd Gordon, founder of TradingAnalysis.com, said in the same “Trading Nation” interview.
He cited Goldman’s report that restaurants lost some $150 billion in sales last year, with smaller establishments taking the brunt of the losses. More than 100,000 independent restaurants closed, analysts wrote.
“As much as I hate to say it, the world is changing,” he said. “Food services that are embracing this touchless payment on mobile apps, the loyalty programs, digital marketing, social media channels, those are the ones who will succeed.”
With a strong loyalty program, more total app downloads than any of its peers, few rivals and a 1.77% dividend yield, Starbucks was one of Gordon’s top plays.
His other pick was Chipotle, “a hedge fund favorite” that looks set to break through a long-term resistance channel, he said.
“They actually don’t even have technical resistance up to 3,000,” Gordon said. “They’re the leader, most innovative, in terms of digital marketing. They’ve secured their supply lines. Strong stock. They should recover. I’m bullish.”
Disclosure: Gordon owns shares of Starbucks.