Markets are straight up this morning and I want to peel off the last of my SPY call options that we bought during the panic last week. We have about 1/3 remaining after taking profits on some of them last week and I’m going to sell the rest of those now for very nice short-term gains.
Now then onto today’s report and a couple new positions:
I’ve mentioned before that I think there’s a great opportunity to make a Revolution Investing bet on the burgeoning Food Revolution. Let’s call it the Healthier Eating Revolution (because the term “Anti-Pink-Slime Revolution” is too graphic).
In a nutshell (we’re talking about food, after all), there’s a major awakening amongst the public that eating cheap processed meat products that are shipped frozen around the globe and heated up and served to you in a plastic setting is probably not healthy. Greasy fast-food joints in particular are in trouble. Selling healthier food to those people as they still have to eat are in a great position. All of which brings me to today’s new positions.
The idea is to create a pair of trades — one is a bet on a company poised to benefit and one is positioned to be hurt from the trend. I’d mentioned a few times in weeks past the idea of shorting McDonald’s and pairing that with a long position in Whole Foods WFM. McDonald’s reported a terrible earnings report and the stock is down 3% on the day and 11% since the first time I mentioned the short MCD idea. I continue to think that McDonald’s is headed much lower in coming quarters as it can’t just change to meet this new trend any time soon. But MCD is great company and a mega-cap stock and it’s always better to short a smaller, even worse-positioned and less-well-managed company. So I’m pairing our WFM long with a short in Sonic SONC.
Market cap: $1.29BB
Net cash: $34.84MM
Analyst estimates (earnings per share): 2014, $0.83; 2015, $0.99
We’re talking ’bout a drive-thru 50s themed restaurant with funny commercials that sells some of the worst food on the planet for cheaper than you can buy it unprocessed at the grocery store. You can’t hardly make a home-cooked meal of cheap ground beef cheeseburgers, fried potatoes and a milkshake for as cheap as you can buy one that has been prepared for you at Sonic. The only way that trend can continue is for Sonic to find ever cheaper ingredients than the processed products its putting in its meals right now.
I loved the Sonic corn dog with a bag of potato chips for 99 cents that I used to get on my way to my job as a kennel boy after middle school was out each day. How can they still charge the same thing for a corndog these days as they did back then? Talk about no pricing power. Anyway, corndogs as a growth industry is a no-no.
Sonic’s priced for perfection, with the stock up 300% in the last 30 months, trading at all-time highs leaving it trading at a lofty 2x sales and 24x next year’s earnings estimates on just 5% expected revenue growth. I’m adding Sonic as a short position in the portfolio with a starter short SONC common stock position. They report earnings tonight.
Whole Foods: $WFM
Market cap: $13.59B
Net cash: $796MM
Analyst estimates (earnings per share): $1.53, $1.71
Eating healthier food, organic or otherwise unprocessed or just less-processed, is what people are doing more of every day.
Local foods are best, and I love the idea of supporting local business so much that I used to end every episode of Happy Hour saying, “Support your local business.” Whole Foods does some local and tries to pretend its a Feel-Goodie kinda’ corporation, but we need to keep it real in our analysis like we did with Google’s “Do No Evil” slogan — owning the stock despite their hypocrisy as they lobby for more profits and protection from smaller competitors. Whole Foods hurts local markets, but when it comes to investing, there’s no way to buy a major corporation that doesn’t hurt local markets these days.
I remember going to one of the original Whole Foods markets with my older brother back when I visited him in Austin, TX in the early 1990s and unlike Sonic, Whole Foods has pricing power — it costs a lot more to buy a jar of peanut butter at Whole Foods today than it did twenty years ago.
Whole Foods has been sold off lately and the stock is much cheaper than Sonic’s despite the fact that Whole Foods is growing its topline at more than twice the rate at Sonic. Whole Foods trades at 1x sales and 21x next year’s earnings estimates. I’m adding a starter long position in Whole Foods common stock.