We are removing short BKW from our Best Ideas as increasingly positive macro data and a strong quantitative setup are overshadowing the bearish aspects of Burger King’s outlook. In BKW’s place, we are adding DRI on the long side.
BKW has been moving against us recently as continuing gains in employment growth, particularly among younger age cohorts, overshadow the company-specific negatives.
DRI: Pursuant to our Black Book, we now see an attractive risk-reward setup on the long-side of DRI. We believe the downside in the stock is limited, even with continuing mismanagement, as the dividend yield continues to attract investors. Despite this, we believe the board and broader investment community will agitate for change in the company’s C-Suite, either in terms of personnel or strategy or both. We believe the stock price is currently trading at a discount to the value of the sum of the parts and expect that PE is likely sizing up the company presently.
BKW: Robust macro data continues to support stocks within the XLY and BKW is not an exception. The issues we see in the business model, and the cash flow pressure on franchisees, are very real but positive macro data are taking center stage. Given the importance of timing on the short-side, and our lack of visibility as to when the market will begin to discount the issues we know are at play in BKW, we do not see the stock as an attractive short.