Restaurants That Serve Up Strength

 | May 11, 2012 | 5:30 PM EDT
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Restaurants have continued to show fundamental and chart strength despite the economic weakness of the past few years. Let's look at several top-performers in this important sector.

Large-cap Starbucks (SBUX), which is correcting along with the broader market, is an S&P 500 component that gets a lot of attention as a gauge of consumer willingness to spend on non-necessities. On Friday afternoon, the stock was trading at around $55, just below its 50-day line, in its first possible base since the summer and autumn of 2011.

Pizza chain Papa John's (PZZA) is another price leader, having notched a 21% gain so far this month. The stock bolted 20% on May 2 after the company beat first-quarter views. It's held most of those gains, pulling back less than 1% so far this week, trading at around $48 Friday afternoon.

Small-cap Texas Roadhouse (TXRH), a casual dining chain that operates locations throughout the country (with several more slated to open in May, June and July) is getting solid support at its 10-day moving average. The stock gapped 7.6% higher on May 1 after its quarterly report. Technically, it's held up well, even amid general market weakness. Historically, technical outperformance during a broader downturn has been a characteristic of a stock poised for further gains. In a market that's in an uptrend, this stock would be in buy range. However, in the absence of a rally confirmed by significant index gains in heavy volume, I'm holding off on new buys for the moment.

A very small, thinly traded restaurant stock is Kona Grill (KONA). The Arizona-based sushi chain has a market cap of just $70 million and it trades about 76,000 shares a day, on average. I consider these thinly traded names to be purely discretionary. When they are among my holdings, I am always prepared to cut losses quickly if a stock falls 10% below my purchase price -- or sometimes even less, if it slices key moving averages or the drop is accompanied by unusual trading volume. 

The company has had news recently that moved the share price. It reported earnings April 30, resulting in a gap-up of 8.5% on May 1. On May 3, after the close, the company said it would repurchase as much as $5 million worth of its stock.  Shares advanced 1.2% in the following session. On Wednesday, the company reiterated its guidance 0f $0.14 a share for the second quarter, on revenue of $24.7 million. Analysts see earnings per share of $0.47 this year, which would be a gain of 52% over 2011.

The stock is now trading at four-year highs, and volume has come in above average in the past two weeks. Because it's such a small stock, there's scant institutional ownership. However, buying has clearly picked up, and confidence in the company remains strong.

As noted above, buys are riskier in the absence of a confirmed market uptrend. That risk is only heightened when it comes to a thin stock, such as Kona. But I like the technical and fundamental picture, so it's a stock I will continue to follow, but I do not plan to enter a position any time soon.

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