I blew a stock call. It doesn't happen too often, so when it does, I get really, really mad.
The hours upon hours of research put into coming to an informed conclusion to articulate to a client. The broken record line of "Be there in a second, hun, I just have to read this last 10-K line," only to realize a second has morphed into an hour and a cold dinner. All of these things, honestly, only give me a better opportunity of scoring a mega win for a client, not outright guaranteeing a successful outcome. I could claim that the blown call to short Brinker International (EAT) in early July was not blown because I tend to be early in the selection process (cut the loss at 5%, or so). While I continue to believe many of the aspects to Brinker's stronger-than-expected quarter are at risk in the second half of 2012, specifically the upside sales into the teeth of rising gas prices and fiscal cliff, the fact is that the stock is doing the opposite of what the hours of research said was probable. But there is an interesting facet, the common thread to most blown stocks calls: the research was flawed.
One surefire way to blow a stock call is to enter into the research like a bull in a China shop, or holding a pre-conceived notion that taints the individual company analysis. I had a bull-in-the-China-shop moment on Brinker, reasoning that dreadful traffic trends at competitor Darden (DRI) was an industry-wide plague brought about by cautious consumers. In turn, that would only worsen Brinker's slowing overall traffic trend that I envisioned, and set up the P&L for disappointment given elevated food costs. Again, instead of leaving myself open to viewing Brinker more favorably upon the analysis of individual characteristics, which had been delivering above plan earnings, a blown call was all but written on the wall.
Head-to-Head Duel: Brinker vs. Darden
The traffic trends at Darden's Olive Garden were so bad amid lower gas prices in the second quarter that it should have set a light bulb that Brinker could be the share gainer, especially as its pricing actions have been far less robust than Olive Garden's have. Brinker's Chilis emphasizes value to consumers, while Olive Garden emphasizes that it wants to make an earnings number through higher prices.
Olive Garden (March, April, May):
- Pricing: +2.8%, +2.8%, +2.8%
- Traffic: -2.6%, -1.8%, -7.5%
Chilis (April, May, June):
- Pricing: +1.4%, +1.3%, +1.3%
- Traffic: +1.2%, +0.2%, +1.8%
Bull in a China Shop: Ignoring Company Attributes
- With the exception of utilities expenses, margins have been lifted by lower repair and maintenance, credit card fees, and insurance expenses, which will stay in place until comparisons are cycled. The key is lower, not leverage, which will unwind should sales moderate.
- Lower vacation expenses caught my attention, which is perhaps a function of increased bonuses for managers. Not only are managers being given incentives to facilitate good service, but also the rest of the staff could be executing strongly to become a manager or snag more tips in a tighter-run restaurant.
- New kitchen equipment has been installed. This is as much a structural benefit as one will find.
- Eliminated menu items, and sales have held steady. Classic Gordon Ramsay maneuver: focus on top-selling dishes to boost menu productivity.