This commentary originally appeared on Real Money Pro at 10:00 on March 30. Click here to learn about this dynamic market information service for active traders.
The fast food sector has presented a mixed bag of late. Some names, like McDonald's (MCD), are nearing all-time highs just as others, like Jack in the Box (JACK), are near their multi-year lows.
Some, most notably Jack in the Box, have complained that they are losing business to the new all-day breakfast menu at McDonald's. Frankly, I had no idea that breakfast at McDonald's was so cherished, but apparently this is a real issue. Either that, or it's a convenient excuse for JACK's abysmal performance.
My favorite pick in this sector is Sonic (SONC). Sonic reported second quarter earnings after yesterday's close, and once again the company shined, beating top and bottom line estimates.
Sonic reported same store sales growth of 6.5%. Better still, the company raised full-year guidance for both earnings (expected to increase by 20-25%) and same store sales (anticipated to rise by between 4-6%). Despite the competitive environment, the company's margins are expanding. Sonic jumped to a 52-week high after hours.
We love it when a company's technicals and fundamentals dovetail. Sonic just posted a great earnings report, and its technicals point toward a new all-time high in the coming weeks.
On the stock's weekly chart, a large inverted head and shoulders pattern (semi-circles) is clearly visible. This bullish pattern has been under construction for a full year and is nearing completion. When it appears in an uptrend, as it does here, the inverted head and shoulders is a continuation pattern. The pattern projects a target for the stock in the low $40s. Sonic's all-time closing high is $36.66.
Just as Sonic's price is forming a bullish pattern, its MACD (moving average convergence divergence) indicator is also signaling a move higher. While the stock has yet to break out of the inverted head and shoulders formation, its MACD has already started to trend higher, forming a pattern of higher lows (HL) higher highs (HH). This phenomenon is known as bullish divergence; in theory, the stock should now follow the MACD indicator higher.
Perhaps the best thing about this company is its size. Sonic is just a $1.65 billion company, so it still has room to grow. It trades at 25x next year's anticipated earnings, but this multiple is justified by the company's anticipated earnings growth of 20-25%. Both the technicals and the fundamentals agree that Sonic should continue to climb.