These Restaurant Stocks Are Heading into Oblivion – Here’s How You Cash In


Download the PDF

At this point, there is no doubt you are familiar with the deteriorating landscape for brick and mortar retailers worldwide. It’s only going to get worse for retail companies that either cannot or will not change their ways and move into the modern era.

But you also know that capitalizing on the downfall of these archaic companies is one of the best ways to make the most money on Wall Street.

We’ve proved this time and time again, notching dozens of triple-digit winners since April.

Our best play was, of course, with our Kroger Co. (NYSE: KR) puts. Our October $25 puts closed out in June for a record-breaking 995% gain. Keep in mind that was a position we held for less than five weeks.

And we’ve had plenty of other notable winners: 324% on Chico’s FAS, Inc. (NYSE: CHS)… 150% on Avon Products, Inc. (NYSE: AVP)… 176% on Abercrombie & Fitch Co. (NYSE: ANF)… 200% on Fossil Group Inc. (Nasdaq: FOSL).

It’s been an excellent run that we have no intention of stopping

Fortunately (for us), retail is not the only sector where companies are about to implode. The contagion has already spread to other consumer areas, and the retail story is about to play out there, too.

Some of these companies will not survive.

Think about your neighborhood shopping mall. Not only does it have “traditional” retail outlets such as clothing, electronics, and housewares shops, but it also is sprinkled with restaurants. From food court vendors to sit-down establishments, chances are you can satisfy almost any of your cravings when you shop.

The problem is nobody is shopping there anymore.

Foot traffic at the malls is plummeting. And if the numbers of hungry shoppers are shrinking, there will fewer people looking for a meal. A lot fewer.

That means lower sales while fixed costs remain high.

And it is not just mall-based restaurants that are feeling the heat. They are just one example of a whole industry that’s in peril.

DineEquity Inc. (NYSE:DIN), the owner of both Applebee’s and IHOP, is struggling to attract diners as fewer families eat out and millennials prefer local restaurants.

Indeed, the greater tendency to use at-home entertainment options rather than eating out has challenged restaurants to keep traffic levels up.

Restaurants are capital- and labor-intensive businesses operating in a saturated industry, catering to the ever-changing whims of the consumer.

Do you remember such terms as gluten-free, vegan and organic when you were growing up? Now, restaurants must serve a public that demands these options.

The more options, the higher the operating costs.

Restaurants frequently borrow money to expand, and they lease spaces for their restaurants. So, when sales fall, bankruptcies can often follow.

Think back on chains like:

Bennigan’s,

Wetson’s

Kenny Rogers’ Roasters

Steak and Ale

Chi-Chi’s

Roadhouse Grill

All-American Burger

All of them were popular until their business models failed them. Even that last example, though it was immortalized in the quintessential 80s teen film Fast Times at Ridgemont High, didn’t have enough demand to stay afloat.

All of these are now in the pages of restaurant history where they will soon be joined by more of their peers.

Rather than waxing nostalgic with a bit of melancholy, think of this as a giant opportunity to make some serious money.

And there is plenty to be made – if you know what you’re doing.

But before we go shorting restaurants willy-nilly, there are a few things you should know…

Here’s How Restaurants Stack Up

First, let’s look at the fundamentals.

Throughout 2017, the S&P 500 gained 19.4% – one of its best performances in years. In fact, it closed higher in all 12 months of 2017, something that has not happened in any year before.

Over the same time frame, the Dow Jones Industrial Average set 71 record closes, beating the previous high of 69 set in 1995, and was up a full 25%.

The NASDAQ kissed the 7,000 level for the first time in December, tacking on a whopping 28.2%. It has 71 record high closes for the year, even beating out the roaring 1990s when it notched only 62 new highs in 1999.


The Dow Jones U.S. Restaurant and Bar index, which tracks dozens of restaurant stocks, is up 21.2% for the year. That looks pretty good… But looks can be deceiving.


The Restaurant and Bar index is capitalization weighted. That means the bigger the stock, the bigger its influence. The giant in the group, McDonald’s Corp. (NYSE:MCD), has a market value of approximately $137 billion. This Happy Meal gained 41.4% in 2017.

Almost all of the sector’s performance came on the back of this behemoth, and that means it hid the poor performances of the majority of the stocks in the group.

Common Wall Street wisdom tells us that a very large percentage of a stock’s price movement can be attributed to the sector it’s in. And sure, just getting into an average stock in a strong industry is likely to lead to good returns.

But do you really want to limit yourself to “likely” and “good” when there are trading strategies to multiply our gains over and over? And what does “common wisdom” say to do when that average stock finds itself in a sinking industry?

The problem hidden by McDonald’s is that restaurants industry are not a strong industry. The number of weak stock in it suggests that there are many problems beneath the surface.

There is nothing coming down the pike right now that suggests a big turnaround for the group.

Of course, not every restaurant is circling the drain. Some may find a way to entice customers to return, but others will not be so smart – or lucky.

Even popular restaurant chains fall victim. Bankruptcy was their only option. And it will be the same for many other restaurants in the coming year.

You have to be careful where you put your money…

Target the dying losers who will inevitably have to declare bankruptcy and wipe out their equity holders.

Before we do, however, I want you to understand why – because it’s an essential part of our strategy.

Many Restaurants Are Getting Hit with a Double Whammy

There are plenty of restaurant companies positioned to fail because secular trends are working against them.

Andy Puzder, the former CEO of CKE Restaurants Holdings, parent to many quick-service restaurant brands, recently said:  “Really, if I were staying on as CEO at CKE, I think my biggest challenge would be to determine how you adjust to the different way people are purchasing things.”

That says it all, folks.

Millennial purchasing trends have changed everything from clothing to groceries, and that change has reached restaurants. Chains like Panera Bread Company and Starbucks have incorporated mobile order and pay options, while McDonald’s now has digital kiosks.

The CEO of Union Square Hospitality Group, Danny Meyer, said that it is not the minimum wage, high rent, or the cost of food that poses the biggest challenge to the restaurant industry.

It’s the customer.

The shift is on as more and more people take out their smartphone and press an app that allows the food either to be picked up right there or to be delivered. It goes beyond just making reservations online; they are ordering online, and that means restaurants have to automate in the kitchen.

The National Restaurant Association explained, “The typical restaurant guest today is not the same as the typical restaurant guest 20 years ago.” Consensus says there has been an increase in customer expectations for restaurants regarding nutrition, allergy issues, sourcing, and sustainability over the past two years alone.

Restaurants also struggle with what’s known as the “reputation economy.” A brand can live or die based on what is being said about them online. The challenge for large brands is that reviews on sites such as Yelp, Trip Advisor, Google, and UrbanSpoon reflect customer experiences in individual locations, not with the brand as a whole. No amount of TV advertising can make up for poor reviews on these sites.

Studies show that 80% of consumers trust online reviews about a business as much as a personal recommendation. And a Harvard Business School researcher found that a one-star increase in a restaurant’s Yelp rating correlated with a 5-9% increase in revenue.

Restaurants live or die on these social ratings.

The second whammy is competition.

According to the New York Times, after a prolonged stretch of explosive growth, fueled by interest from Wall Street, experts say there are now too many fast-food, casual and other chain restaurants.

The paper further talks about the explosion of Wall Street and private money poured into the restaurant industry since 2000 as they sought out more tangible enterprises than the dot-com start-ups that were going belly-up.

According to the Bureau of Labor Statistics, there are now more than 620,000 eating and drinking places in the United States, and the number of restaurants is growing at about twice the rate of the population.

Recently, meal kits entered the scene with the likes of Blue Apron, Hello Fresh, SunBasket, and others, creating a new $1.5 billion business. Not to mention Amazon’s purchase of Whole Foods was specifically strategized to compete in this space.

Meal kits are cannibalizing not just restaurants but also supermarkets. They’re the perfect blend of what millennials love — eating healthy, embracing the experiences of do-it-yourself, and (of course) posting pictures of food online.

Similar to retail, advances in technology have changed the way customers buy and now force restaurants to keep up. But, unlike retail, restaurants still need to deliver an experience in their locations that is consistent, which costs money and requires planning.

But if you think that the stocks of some of your beloved restaurant chains are cheap enough to buy and represent great bargains, think again.

You know how Zenith operates. We focus mostly on dying sectors and figure out how to continually profit from their demise. As you know, the service focused on the retail sector for the last eight or so months. We generally recommend that members buy puts at a specific price and then continually roll their profits into further and further-dated trades to effectively profit off the back of a company’s fall.

We assess the health of these companies much as a doctor figures out how you are doing. For companies, we look deep into the fundamentals which we think are the pulse, the EKG and CAT scan of its operations. We look at real liquidity, cash burn and debt load. When debt especially gets out of hand relative to available cash, we know the patient is on its last legs.

My Top Three Profit Prospects

Over the coming year, I’ll roll out my list of restaurant stocks that are heading into the dumpster. I’ll tell you what I see and exactly how you can profit from it.

Here are three stocks on our list of potential targets for 2018. Consider this just a taste to whet your appetite…

Restaurant Reckoning #1:
Shake Shack (NYSE: SHAK)

One glance at their chart and you’d think that burger chain Shake Shack is doing great. But you’d be wrong.

Although the stock gained 20.7% in 2017, most of that happened in the final weeks of the year thanks to a rare bit of positive earnings news and an upgrade from Wall Street.

However, when you look back at its history, it still trades at a fraction of where it did at its peak in 2015 at $96.74. It closed out 2017 at $43.20.

While the company does not carry excessive debt, Q3’s $500,000 in interest payments is a record high. And while there has been a slew of improvements last year, including stronger operating cash flow, most of this good news is already priced into the stock. Same-store sales are likely to be flat this year, and margin expectations are far too optimistic.

You can be sure that SHAK is on my radar.

Restaurant Reckoning #2:
Noodles & Co. (Nasdaq: NDLS)

It is just unprofitable, and its late 2017 rally seems to be just a last gasp.

Operating cash flow has been running negative two of the past three quarters, only just barely breaking even in Q3, and it’s been trending lower over the past few years after peaking in 2014-2015.

Interest payments have been running near all-time highs of $1MM/quarter for the past year, and capital expenditure (CapEx) is down. In fact, CapEx is limited by contract from a 2017 cap of $22MM to $10MM/year after that. That forces the company to rein in organic growth prospects by more than a healthy company needs.


Moreover, the company still burning through cash. By my math, they should be insolvent in 4 quarters.

Restaurant Reckoning #3:
Fiesta Restaurant Group (Nasdaq: FRGI)

Trading at about one quarter of its value at its peak, Fiesta Restaurant Group was down 36.3% in 2017.

This company, which operates fast-casual chains Pollo Tropical and Taco Cabana had revenues dip 6.2% during the first nine months of the year – despite opening 14 new locations.

The reason was falling foot traffic. Same-store sales for Pollo Tropical and Taco Cabana were down 8.5% and 7.2%, respectively, for the first three quarters of the year. In fact, Q3 revenues were the lowest in almost three years.

CapEx has been cut back accordingly, down to about $12MM/quarter vs. around $20MM/quarter last year. Interest costs have been gradually ticking higher, and while we don’t see the company running into solvency problems just yet, it is getting too close for their comfort.

Are You Ready to Move on These Trades?

These are just three examples in a huge sector that I have been studying and researching for the past several months. I already know exactly how to play these restaurant stocks: the same way you have played retailers, creating dozens of upon dozens of opportunities for incredible profits.

Using the carbon trading technique, we will be able to target dying stocks over and over again as they slowly collapse – aiming for triple-digit gains each time. Buying puts on the stocks with too much debt and slowing sales will give us low-risk opportunities to create outsized gains in the little time these companies have left before they’ll be unable to meet their monthly interest and principal payments.

It’s going to be a rough road ahead for restaurants that cannot adapt to the changing demographics and technology of today. At the same time, it will be highly profitable for traders and investors who figure out how to play a company’s debt, rising costs, and falling sales to their benefit.

I want you to not only profit from mistakes made by a long list of failing restaurants but generate massive amounts of wealth in the process. That’s our goal – and we won’t let the market, the government, or naysayers get in the way.

Sincerely,


Shah Gilani