Chicken wing restaurant chain
Wingstop Inc. NYSE: WING shares have been scorching hot throughout the pandemic even outperforming the benchmark
S&P 500 index NYSEARCA: SPY. Restaurants with
off-premise distributions channels including drive-through, delivery, take-out and curbside have outperformed it’s
dine-in counterparts during the pandemic. To add more heat, Wingstop had another factor recently announced that seals its proverbial price “top” in the form of a binary event. It was recently inducted into the S&P 400. This presents exit liquidity opportunity as passive equity index funds buy into the announcement as mandated. Trading at 148X earnings, Wingstop has been a trading like a tech stock and is also suffering from the money rotation to value. Prudent investors should consider using reversions at price inflection points to wind down positions while liquidity is strong.
Q2 FY 2020 Earnings Release
On July 29, 2020, Wingstop released its second-quarter fiscal 2020 results for the quarter ending June 2020. TheCompany reported earnings-per-share (EPS) of $0.39 beating analyst estimates for a profit of $0.29 by $0.10 per share. Revenues surged 36% year-over-year (YoY) to $66.1 million beating consensus estimates of $62.46 million. System-wide sales improved 37% to 509 million. Domestic same-store-sales (SSS) grew by 31.9% YoY beating 29% estimates. Margins improvement with the drop in chicken wing costs. The Company was also able to open 23 Wingstop restaurants in the quarter and expects to open 120 to 130 restaurants before the end of the year. Wingstop also increased its quarterly dividend to $0.14 per share from $0.11 per share.
The Best It Gets?
Wingstop had an extremely positive narrative made even brighter under the dark backdrop of the wreckage in the dine-in restaurant segment. The Company had the strongest quarter since its 2015 IPO. However, that narrative and sentiment may be coming to an end as the reality of valuations emerges with the economic restarts. Wingstop is convenient but limited in terms of products. What happens when dine-in restaurants continue to reopen? There is pent-up demand with diners for diversity and eating in a restaurant as opposed quick carry-outs and having to re-heat delivered food.
One Trick Pony
With a name like Wingstop, you don’t expect to buy pizza there. Although it’s possible, as evidenced by Red Robin Gourmet Burgers NASDAQ: RRGB having success rolling out Donatos Pizza offerings. The Company is cubby holed into chicken-based offerings. The success of chicken wings has caused other chains to adopt offerings and possibly encroach it in its space like Brinker International NYSE: EAT with its “Just Wings” virtual delivery offering at its Chilli’s Bar and Grille restaurants. While specialization can be an advantage, lack of diversification and competition can be a detriment depending on the narrative. With a price-earnings (PE) multiple over 145X versus peers trading under 30X and limited product offerings, Wingstop share price can’t rationally be justified on fundamentals alone.
S&P MidCap 400 Liquidity
On Sept. 4, 2020, Standard & Poor’s announced changes to their benchmark indices. Wingstop move from the S&P SmallCap 600 to the S&P MidCap 400 index. This upgrade will cause S&P MidCap 400 ETFs and passive index funds to add shares of WING leading up the effective trading date of Sept. 21, 2020. It’s not certain how much net buying will be present or affect shares since WING has to be sold out of S&P SmallCap 600 funds and purchased by S&P MidCap 400 funds. However, prudent investors should consider taking advantage of the added buying liquidity to wind down positions while shares are still trading at lofty multiples.
WING Stock Trajectory Levels
Using the rifle charts on the weekly and daily time frames provides a precision view of the landscape for WING stock. The weekly rifle chart formed a market structure high (MSH) sell trigger under $134.51, which is the opposite of the weekly market structure low (MSL) buy trigger above $80.87. The weekly stochastic is forming a divergence stochastic peak setting up a potential fall under the 80-band. Since shares overshot both the weekly 5-period and 15-period moving average (MA) on the sell-off, a reversion tightening is in the cards. The daily rifle chart shows the panic selling initially bottoming at the $138.36 level to form a slingshot reversion back to the daily lower Bollinger Bands (BBs) at $143.78. If the daily BBs can break, then a further reversion is possible to the daily 5-period MA overlapping the $155.82 Fibonacci (fib) level. Investors should consider using these reversions to wind down positions at the $146.21 fib, $151.81 fib and $155.82 daily 5-period MA + fib with best-case channel tightening back to the weekly 5-period MA at $160.34 fib. If the weekly stochastic falls through the 80-band, then a trend breakdown is possible towards the $124.85 to $114.79 fib range. For this reason, it would be prudent to keep trail stops on positions if the weekly MSH triggers under $138.36.
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