Despite the S&P 500 rising approximately 27.1% over the past year, casual dining stocks have meaningfully outperformed this index.  Around a month ago, we published a note titled “The Casual Dining Bubble.”  In this note we highlighted the rich valuations across the casual dining sector and questioned the quality of these multiples.  Since then, casual dining companies in aggregate have begun to underperform the S&P 500 and same-store sales estimates for 4Q have come down.  Needless to say, valuations are still at very high levels which we cannot support or explain within the context of a legitimate fundamental backdrop.  We are convinced casual dining stocks are in a bubble, but we do not know when this bubble will pop.




CASUAL DINING ANOMALY - casual dining ebitda


CASUAL DINING ANOMALY - casual dining pe





Highlighted in the two charts below, casual dining sales and traffic trends have been anemic for over a year and a half.  Industry traffic has not had a positive month since February 2012.  These statistics suggest that such strong outpeformance of casual dining stocks over the last year is unwarranted.







In the following chart, we compare the aggregate price performance and short interest of the stocks in our casual dining index.  Despite very weak fundamentals, short interest has been falling since late 2011.  The continuation of this trend suggests that investors don’t want to get in the way of the sectors positive momentum.  Being on the wrong side of a bubble can be costly, to say the least.





Although 4Q same-store sales estimates have been revised down over the past month or so, we still believe they are too high.  4Q was supposed to be the bounceback quarter for the industry.  While it will be a stronger quarter sequentially, compared to 3Q, it will still be relatively weak on a historical basis.





Despite the consensus expected recovery in 4Q, casual dining stocks have underperformed the S&P 500 over the past month and have meaningfully underperformed the index over the past week.  This could signal that investors are coming to their senses.  The majority of valuations across the sector are excessively high and unwarranted.  That being said, we expect to see significant downward multiple revisions in the space but, alas, we don’t know when this will happen.  Perhaps the last month has signalled the beginning. 


CASUAL DINING ANOMALY - outperformance changing




Howard Penney

Managing Director


Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more