Harry Domash's Winning Investing

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Beat the Market With Restaurants?

Despite the turbulence, the overall market, at least as gauged by the S&P 500, is still up around 2%, year-to-date, and tech stocks are still up 6%.  

But believe it or not, U.S.-based restaurant stocks, not even on most investors’ radar, have done even better. They are up 10% so far this year.

Now that I’ve got your attention, I’ll show you how to find worthwhile restaurant stock candidates. As usual, I’ll use the free finviz stock screener to illustrate the process.

finviz Stock Screener

Start at the finviz homepage (https:finviz.com) and select Screener. Then click on “All” to see the available stock selection filters. Setup a filter using the associated dropdown menu to select a screening value.

Define Screening Universe

Define your restaurant stock universe by using the Industry filter to specify “Restaurants” and the Country filter to select “USA.” Then, use the Market Cap filter to rule out very small stocks, which are higher risk, by specifying “+Small.” Doing that limits your list to stocks with market-capitalizations (value of all outstanding shares) above $250 million. Also, because cheap stocks got that way because market players see problems ahead, use the Price filter to limit you list to stocks trading above $15 per share.

Earnings Rule

All else equal, share prices track earnings. So, the more the expected EPS growth, the better. Select “over 10% using the ‘EPS Growth This Year’ filter to confine your list to stocks that analysts expect to growth per-share earnings at least that fast.

Uptrending Stocks

This may sound counterintuitive, but stocks that have already moved up in share price (uptrending) are your best bets in terms of future stock appreciation potential. You can find uptrending stocks by comparing a stock’s current share price to its moving average, which is the average closing price over a specified time period. Use the 20-Day, 50-Day, and 200 Day Simple Moving Average (SMA) filters and specify “Price above SMA” for each.

Too Late to the Party?

A downside of focusing on uptrending stocks is that your stocks might be overvalued by the time that you find them. Thus, it’s important to check valuation. You can do that using the Forward Price/Earnings ratio which compares the current share price to the next fiscal year’s forecast earnings. Forward P/S often runs as high 50 for popular stocks. Start by specifying “Under 25” for Forward P/E, but try raising it to 30 or 35 if your screen doesn’t turn up enough stocks.

Follow Smart Money

Use the Analyst Recommendation filter and specify “Buy or Better,” to confirm that analysts following stocks turned up by our screen haven’t found problems that our checks missed. Along those same lines, specify “Over 60 percent” for Institutional Ownership to assure that mutual funds, banks, and other big players are buying these stocks.

Passing Stocks

Out of 47 U.S.-based restaurant stocks, only three passed these tests when I ran it. Click here to see which stocks the screen is turning up today.

Denny’s (DENN): Has more than 1,700 franchised and company owned restaurants in the U.S. and around the world.

McDonald’s (MCD): More than 34,000 company owned and franchised restaurants in the U.S. and globally.

YUM! Brands (YUM): Operates and franchises more than 44,000 restaurants under the KFC, Pizza Hut, and Taco Bell brands.  

As always, considered the stocks turned up by this screen to be research candidates, not a buy list. The more you know about your stocks, the better your results.

published 11/13/18

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