Shares of chicken wing purveyor Wingstop jumped 61 percent in their Friday debut, making the fast food company just the latest restaurant name to surge since unveiling shares. And that has led to the observation that the fast food space may currently be marked by a good deal of momentum-driven sentiment.
“I think you have to be very careful about the ‘food of the month club,’ not because they’re bad businesses, but just because the way these things trade, they tend to have a lot of froth in momentum and then the investing aperture goes somewhere else,” said Zachary Karabell, global head of strategy at Envestnet.
Other recent restaurant offerings include Shake Shack (up some 250 percent from its May IPO) and Papa Murphy’s (up almost 80 percent from its May 2014 offering). Of course, the grandaddy of trendy fast food stocks is Chipotle, which is trading at almost than 14 times the price at which it was initially offered in 2006, on the back of massive earnings growth.
Whether Wingstop will be able to do the same remains an open question. The company now sports a market cap of almost $900 million, despite reporting just $9 million in net income for fiscal 2014. That means it’s sporting a valuation triple that of winged competitor Buffalo Wild Wings, despite the fact that Buffalo has expanded earnings by 20 percent year over year (on a Q1 2015 versus Q1 2014 basis) while Wingstop increased revenue by just 14 percent (in 2014 compared to 2013).
That said, Wingstop does note in its hashtag-bedeviled prospectus that it has an “unfair advantage” over its competitors: “It’s flavor that defines us. It inspires our fans and fuels their crave.”
Of course, for short-term traders, the fundamentals don’t really matter, as long as the market’s own “crave” for these hot issues doesn’t subside.
“From a trading perspective, I’m going to put simple 10-day moving averages and 50-day moving averages underneath these names and I’m going to continue to play these things to the long side until I see some sort of trend break,” Craig Johnson, technical analyst at Piper Jaffray, said Friday on CNBC’s “Power Lunch.” “Until then, I’m going to let it ride.”
Midmorning Monday, Wingstop shares were down nearly 4.4 percent from Friday’s closing price.
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