Food for Thought on 2 Restaurant Stocks

Mea culpa. I recommended both Cracker Barrel and Jack in the Box too early considering were they went shortly thereafter. My May write-up on CBRL came with the shares at $103.77. At that time Value Line was looking for the company to post earnings per share of $7 in FY 2022 (ends July 29, 2022) and $8 in FY 2023. Since then those estimates have dipped by 15.3% and 17.1%, respectively, to $5.93 for the FY about to end, and $6.63 for the FY ending in July of 2023. Between overall market weakness and that company-specific bad news CBRL plunged to as low as $81.87 last week before rebounding to close on July 1, 2022 at $84.82. Investors who own it now have three basic choices on what to do. Hold on and wait for an upturn. Sell and move on to something which appears more tempting. Buy more while the shares are on sale. How can you decide which course is best? As always, go to the facts before doing anything. CBRL's FY 2021's EPS were $5.14. In April of last year the stock peaked at $178.80 in anticipation of at least $7 in EPS during FY 2022. Traders happily paid almost 35x earnings back then, or 25.5x CBRL's 15-month forward estimate. Since that top Cracker Barrel dropped a massive 54.2% to last week's new 2021-2022 low. The stock's long-term average multiple runs about 18.1x accompanied by around 3.07% in yield. At its current quote those metrics were 12.8x the company's already downwardly revised FY 2023 estimate along with almost twice CBRL's typical historical yield. Assume a gradual reversion to a normalized valuation and $120 or so appears quite possible by mid-summer of 2023. Reverse engineer the current $5.20 annual dividend rate to normal and the possible price target ratchets up to $169. Hitting $120 over the coming year would deliver about 47.6% in total return. Getting back up to $169 would more than double your investment from CBRL's current quote. Both of those goals are quite reasonable, in my view. CBRL topped out between $162 and $185 during each of the seven calendar years stretching from 2016 right through 2021. The shares fetched over $150 less than 12 months ago. Note, too, that analysts now expect the new fiscal year starting in under 30 days will show an 11.8% EPS rebound from this year's somewhat disappointing number. The harsh selloff appears to have more than discounted all known news. Now that you know the facts, I'd say there is absolutely no reason to sell. Either hold on to any long positions or average down on this high-quality, good-yielding stock. The story with Jack in the Box is similar. As of July 1, 2022 JACK was down greater than 49% from its early 2021 peak. It is now offered at a substantial discount to its long-term average P/E while paying investors well above its typical yield. JACK's fiscal years end on the Sunday closest to Sep. 30 of the same year. Sure, FY 2022 EPS are going to be down about 17.8% from the prior year but the share price has receded by almost triple the scope of the profit reduction. Analysts now see a better than 16% rise in FY 2023's profits per share which suggest the recent bottom, at $54.80, is unlikely to persist or worsen. The same three choices apply for holders of JACK. Buy more, sell or hold? A more normalized valuation of 20x next year's expected EPS suggests $137 or better is a likely year-ahead goal. Reverse engineer the dividend and you'd come up with a $109.32 price target. Reaching the lower-end goal price would provide a handsome 92.6% total return. Hitting the more optimistic target could send investors at today's price a 140% total return by next summer. It never feels good to have bought before the final bottom. You kick yourself for not waiting a bit longer to get in even cheaper. Just remember this though. The only people who always buy at exact lows and only sell at top ticks are liars. Being approximately correct in your timing decisions is all you need to make a ton of money. Waiting for confirmation of an upward trend before purchasing will only ensure that you never get in very close to the final bottom. By the time momentum investors jump on board the easiest money has already been pocketed. CBRL offers options out to Dec. 16 of this year and JACK has expirations as far out as Jan. 19, 2024 if you're inclined to trade these names via naked puts sales or call purchases. I've been averaging down on both CBRL and JACK. I believe you'd be wise to do the same. If any readers disagree with my assessments on these two stocks please feel free to let me know why.

Food for Thought on 2 Restaurant Stocks

Being approximately correct in your timing decisions is all you need to make a ton of money.

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