2 Powerful Stocks In An Overlooked Sector

It’s a $632 billion industry with more than 970,000 locations in the United States. This industry employs 12.9 million workers, making it one of the largest private-sector employers on Earth. Daily sales approach $2 billion with a continually growing active demographic.

Yet interestingly enough, this sector is often looked down upon by investors.

Pundits find all kinds of reasons to be bearish on the sector. I have heard everything from the European debt situation and domestic job growth to the real estate downturn being bandied about as reasons to avoid this huge sector of the economy.

But these investors are missing on a great opportunity to profit…

Even in this weak market environment, some of the stocks in this sector have been in solid rallies — with most remaining above their 200-day moving averages. Despite the good performance, analysts still remain cynical, with only 48% of them giving “buy” ratings to this group of stocks.

If you haven’t guessed the industry, I’m talking about the restaurant business.

As you may know by now, I like buying when others are selling. My stock screens have targeted two restaurant stocks that I believe offer great value for investors right now. In addition, I strongly think the U.S. economy has turned the corner and will continue to improve. This upswing will only help the restaurant industry.

Here are my two favorite picks in this sector…

1. Cracker Barrel Old Country Store (Nasdaq: CBRL)
This company operates 615 locations in 42 U.S. states. The concept is a little kitschy with a down-home flair. Customers enter and exit the restaurant through a mock up of a country store that sells everything from rocking chairs to candy.

Cracker Barrel serves southern-style food that is quite tasty and well priced for the quantity and quality. Located near interstate highways, it targets  folks taking road trips, who are more likely to shop at the country store. Rarely have I noticed a Cracker Barrel that didn’t have a full parking lot and a line of customers waiting, either in line, or on the porch in rocking chairs.

Obviously, customers love this place and the stock price has reflected this fact. Shares have been uptrending since mid February, with the 50-day simple moving average acting as solid support. During the last five trading days, price has pulled back from the uptrend, yet it still holds above the 50-day simple moving average.

This has set up a classic value zone “buy” opportunity in Cracker Barrel. In addition, there is a solid fundamental reason to buy Cracker Barrel in the near future. On Aug. 6, shares will be going ex-dividend on its quarterly $0.40 dividend. This works out to about 0.6% of the stock price. Therefore, investors who purchase soon on the technical pullback or wait for the ex-dividend date would be buying into solid setups for profit.

2. Bob Evans Farms (Nasdaq: BOBE)
This chain has  565 restaurants serving comfort foods to road-weary clients. The company also sells a variety of home-style frozen convenience foods in supermarkets and other food stores. Restaurants are mostly located in the South and West.

What I like most about Bob Evans is its dividend growth rate. The company has increased its dividend by 56% since 2009, and is due for another increase next quarter. Revenue has not met expectations but cost-saving initiatives enabled the restaurant chain to beat earnings forecasts in the second quarter of the year.

The fact that the company has relatively low debt levels and that it’s buying back its stock shows confidence from management in the company’s future prospects. Technically, Bob Evans has dropped sharply during the last three trading sessions. The stock price has broken the 50-day simple moving average but is still holding above the 200-day simple moving average. In other words, it’s a classic technical value pull back zone play right now.

Risks to Consider: Regardless of past performance, it’s important to keep in mind that restaurant stocks are highly dependent on the economy. Although I think the U.S. economy has started its upswing, one really is only certain of such things in hindsight. Always use stops and position size properly when investing.

Action to Take — > I like both of these stocks right now. Cracker Barrel is my No. 1 choice in the restaurant sector, followed closely by Bob Evans. Buying on this pullback, with properly-positioned stops, makes investing sense, depending on your risk tolerance. I see Bob Evans testing its highs at $41 and Cracker Barrel hitting $70 within a year from today.