Wingstop due for a correction, but don’t fly the coop

Key Points

• Wingstop is a high-quality growth name, but its price is due for a correction.
• Analysts support the stock, but the sentiment slipped to "hold," with a price target lagging the market. 
• Institutions own nearly 100% of the stock, but rotation and profit-taking are underway. 

There are many reasons to fear a correction in Wingstop Inc. NASDAQ: WING, but investors shouldn't get ready to fly the coop. While a correction is more than due, the trajectory for growth suggests the uptrend will continue following a healthy correction, and this is a quality name in restaurants. 

In this light, trimming positions and taking profits may be in order, but not a run-for-the-hills style position closeout. 

Why might Wingstop's price action correct to lower levels? 

The stock price is up more than 65% since its last bottom with no appreciable pullback in price action. That creates overbought conditions, which won't lead to correction but set the market up for price weakness. Add to that an incredibly high valuation, slowing growth, bearish signals in the price action, a hurdle in the analysts' sentiment, and the odds of correction grow. 

The question is whether this market will pull back significantly or enter a consolidation phase. 

Highly valued with slowing growth, Wingstop looks ripe to pull back

Regarding value, Wingstop trades at a very high 105x this year's earnings consensus and a whopping 90x next year's. An expectation for solid growth supports the P/E multiple but values the company at twice the rate of Chipotle Mexican Grill Inc. NYSE: CMG, the premium growth name in casual dining. 

Regarding growth, the company is in a hyper-growth phase, but growth is slowing. Growth peaked near 50% last year and slowed to the low 30% range this year. Growth is expected to continue in 2024 but will slow to only 15%, suggesting the market is overvalued. Chipotle trades at 52x this year and 45x next year’s consensus figures while sustaining growth in the teens. 

The charts are sketchy. The daily price action chart shows a bearish engulfing pattern that swallows two weeks of price action and significant divergence in the indicators. The MACD and stochastic have diverged from the new highs, with stochastic trending lower and showing considerable weakness by falling below the upper signal line. 

The risk for bullish traders is that market weakness will lead the stock price to retest the recent support level or lower; the caveat for bearish traders is that a deep correction is far from assured, and there is a high probability this market will move sideways in consolidation. 

Wingstop is a most upgraded stock, but that is only worth so much

The analysts are bullish on this stock and have been raising their price targets all year. Analysts' activity is enough to have the stock ranked on the "most upgraded stocks" list, but their price targets have lagged the market, that is, until now. 

Trading at $250, the stock was right at the high end of the analysts' expected range, a hurdle for sentiment. TD Cowen changed that, which lifted its target to $270, setting the new high end. This opens the door to upward movement in stock prices but could have a limited effect if other analysts do not lift their target. The consensus is still about 17% below the recent highs and may drag on price action until the next earnings report due in mid-February. 

Institutions may tip the balance

Institutions own a considerable amount of Wingstop and will be the deciding factor. Collectively, institutional holdings are 99% of the stock, including significant holdings among index and mutual funds. The balance of activity in Q4 is bullish and helped to lift the market to its current levels, but it is also mixed, suggesting rotation within the group. 

Numerous large holdings were cut by high double-digit percentages in the period, and this type of selling may increase as share prices rise.