Buy This Mainstay Of America’s Roads For 29% Upside
Like stars in the sky, the sheer number of differing opinions and interpretations of the same financial data is simply mind-boggling.
It is said that if you ask three analysts their opinion on the market, you’ll get five different answers. I can’t think of another field of human endeavor that garners so many different ideas from the same data. Even weather forecasting isn’t as open to interpretation as the financial markets.
However, this uncertainty is how the market exists. If everyone had the same opinion, there would be no one to buy the selling or sell into the buying.#-ad_banner-#
The number and range of differing opinions is why I pay particular attention when two ultra-successful investors agree on the same premise. The famed commodity investor Jim Rogers and Fidelity Investments’ best-known mutual fund manager, Peter Lynch, emphasize investing in what you know. The thinking behind this advice is that if you are familiar with a particular business, service or product, not only are you an expert of sorts, but many others are also likely interested in the same things, which helps create a bullish environment.
I took this advice to heart when I realized that a company in one of my favorite industries is set up to make a great investment. I really enjoy the services and products of this great American industry, and I am clearly not the only one. With nearly 1 million outlets in the U.S. and projected sales of close to $700 billion this year, this industry accounts for 4% of U.S. GDP.
If you who haven’t guessed, I’m talking about the restaurant business. I love to eat at all types of restaurants, and I am not alone. Americans love to go out to eat, and this trend is only increasing. According to the National Restaurant Association, 47% of every food dollar is spent in restaurants, up from 25% in 1955. Narrowing down the broad restaurant sector into one of my favorite dining options reveals a company that is set up as a strong buy candidate.
The subsector is steakhouses and the restaurant company is Texas Roadhouse (Nasdaq: TXRH), a full-service casual dining restaurant chain based in Louisville, Ky. The company was founded in 1993 and boasts 400 locations in 48 states.
Shares have soared nearly 60% this year on lower beef and gasoline prices. Lower beef prices boost profit margins, and cheaper gasoline means more potential diners on the road. With an average per-diner check of $15, Texas Roadhouse occupies a niche below high-end steakhouses but above fast food, providing diners an experience that rivals many steakhouses in quality, atmosphere and choice for a fraction of the cost.
Right now is perfect time to buy. The company just announced third-quarter results that missed estimates with diluted earnings per share falling 4.6% to $0.24 and costs of sales rising 2.6% at company-owned locations and 4% at franchised locations. These numbers resulted in shares being knocked down, opening up a buying opportunity.
For the coming year, management expects positive growth in same-store sales and low food cost inflation, along with 25 to 30 new locations. The third-quarter miss is minor compared with the upside for a long-term hold from the current levels. In addition, the economic recovery can only help profits.
Taking a look at the technical picture, upward moving shares hit upside resistance near $29, the earning miss has knocked shares off of the uptrend into the low $28 area, providing the buying opportunity.
Risks to Consider: Beef consumption is on a long-term downtrend in the United States. After peaking in the 1980s, consumption of red meat per capita has been slowly decreasing. In addition, restaurants like Texas Roadhouse are dependent on road trippers, so reasonable gasoline prices are key. Always use stop-loss orders and diversify when investing.
Action to Take –> Buying Texas Roadhouse in the $28 area with stops just below $25 and a 12-month target price of $36 makes solid risk/reward sense.
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