The King Is Dead, Long Live the King!

If you've watched or read anything that pertains to English history, then you've probably heard the statement, The king is dead, long live the king! The gist is that the most recent king is dead, and is replaced by a new one whose reign begins then and there. It's not too different with trading years -- 2014 is done and we have entered a new one that is 2015. The books are closed on 2014, returns counted, and once again the scorecard is set back to zero and the slate of returns is wiped clean. Looking back over the prior 12 months, there were a number of things that took investors by surprise: the severe winter weather that left many questioning the health of the consumer; the reversal in housing even after said winter storms abated; and the pick-up in the savings rate even though disposable income was under pressure. That pressure hit restaurant stocks, including Red Robin Gourmet Burgers (RRGB), Del Frisco's Restaurant Group (DFRG), Cheesecake Factory (CAKE) and others, but as oil and gas prices fell, those stocks rebounded strongly. During Wednesday's year-closing session, shares of Cheesecake Factory hit a new 52-week high as oil futures closed the year at more-than five-year lows. According to estimates from auto group AAA, Americans saved $14 billion on gas in 2014 compared to 2013. As we start 2015, it looks like Americans will continue to reap the benefits of lower oil and gas prices, but the effect has been different for oil companies such as Halliburton (HAL) and BP (BP), both of which are cutting jobs. Those cuts, along with reduced capital spending from the likes of ConocoPhillips (COP), are putting more than a crimp in the demand and revenue outlook for Civeo (CVEO), a provider of housing for oil workers in the Canadian oil sands industry. Restaurant stocks like those mentioned above, as well as travel and leisure ones, such as Carnival (CCL) and Hilton Worldwide (HLT), will be perceived beneficiaries of more cash-flush consumers, but as we were reminded in 2014, the landscape ahead can change. One such change has already started in 2015 as 20 states have increased their minimum wage, according to the National Employment Law Project. All told, 29 states will exceed the federal minimum wage of $7.25 an hour at the beginning of January, according to the National Conference of State Legislatures. While the minimum wage hikes will span from a few pennies to as much as $1.25 per hour in the coming months, restaurant stocks will need to differentiate themselves to win over consumer dollars -- something McDonald's (MCD) has yet to figure out. Keep in mind, too, that restaurant companies will need to contend with the continued move higher in beef and other protein costs. Last year, beef and pork prices shot up thanks to a perfect storm of drought, disease and demand. Conditions have improved but, at best, there's a long lag time -- six months to a year-and-a-half -- between production increases and lower prices. The USDA's Economic Research Service predicts beef and veal prices will rise by another 5% or so in 2015 following a 10%+ increase in 2014. That tells me Sanderson Farms (SAFM) and Pilgrim's Pride (PPC) are stocks to own heading into the first few months of 2015. My concern is that the drop-off in gas prices has led to a rising tide lifts all boats happenstance in restaurant stocks despite the cost challenges that lay ahead. While enthusiasm and sentiment could move the shares higher, the prudent investor in me would recommend taking some profits in stocks such as Cheesecake Factory and others that have had strong runs over the last several weeks. Even though it's still wing-eating season for a few more weeks, a great example of one to take some profits in is Buffalo Wild Wings (BWLD), whose shares have soared to over $180 from below $130 in late October.

The King Is Dead, Long Live the King!

Investors should expect surprises and changing landscapes in 2015.

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