Fast food stocks have been on a tear this year, but one stock among them could see higher highs in the near term.
Fast food stocks have been having a great year.
So far this year, Yum! Brands (NYSE: YUM)—which owns Taco Bell, KFC, and Pizza Hut, among others—is up 23%, McDonald’s (NYSE: MCD) is up nearly 20%, Chipotle (NYSE: CMG) is up 91%, and Shake Shack (NYSE: SHAK) is up a whopping 105%.
SunTrust Robinson Humphrey analyst Jake Bartlett said last month that falling yields have made fast food stocks more attractive.
“The asset-light fast food companies are attracting investors because they are valued as ‘bond proxies’ with their FCF [free cash flow] yields more attractive as bond yields fall, are relatively insulated from wage and commodity cost inflation, and tend to gain market share in recessions (trade down),” Bartlett said.
But of all the big name fast food stocks, there’s one that Mark Tepper, president of Strategic Wealth Partners, says stands out in the group.
“When you look at all these fast-food stocks, they’ve all been on fire this year,” Tepper said to CNBC. “And right now, none of them are cheap.”
However, McDonald’s is winning the all-important breakfast game, and Tepper says this could help the stock climb higher.
“Quite frankly, when you think of fast-food breakfast, you think of McDonald’s, and when I look at everything that McDonald’s is doing from improving customer experience to mobile delivery, store makeovers, all of that stuff, and then you see that McDonald’s is actually the cheapest of the bunch from a valuation perspective, that’s where I’d rather be,” Tepper said. “McDonald’s is a good defensive player right now and I don’t think it’s going to flame out anytime soon.”
Oppenheimer’s Ari Wald says the technical picture for McDonald’s looks interesting as well, even despite recent weakness.
“The stock recently pulled back 7% from its August peak into its recent October low, [but] I think the more important point is that there was no damage to the uptrend done on that pullback,” Wald said.
“In terms of some levels of support, that starts at $206 followed by $200, which is right around where the 200-day moving average comes into play. But more importantly, our expectation is for higher lower followed by higher highs given that bullish uptrend,” Wald said.
SunTrust Robinson Humphrey’s Bartlett is bullish on McDonald’s as well. He has a Buy rating on the stock and a $240 price target – nearly 13% higher than the current price.
JPMorgan analyst John Ivankoe recently reiterated his Overweight rating and $230 price target for McDonald’s, but cautioned that third-quarter comparable sales may come in below estimates. His research has shown “negative same-store sales traffic despite what is otherwise solid underlying fundamentals.”
However, Ivankoe says that McDonald’s is a good longer term bet as he believes the company’s investment in technology will help boost consumer spending in the long run.
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