“The consumer is unshakeable,” Federated Investors’ Steve Chiavarone said boldly.
Low unemployment, climbing wages, and low gas prices means more money in consumers’ pockets. And that means that the “consumer is going to show up” and dine out more often.
And that’s a big win for three fast food stocks.
McDonald’s (NYSE: MCD), Starbucks (NASDAQ: SBUX), and Chipotle (NYSE: CMG) have all delivered fantastic returns so far this year, with McDonald’s up 19%, Starbucks up 48%, and Chipotle up a whopping 83%.
Chiavarone says these fast food names, and consumer stocks in general, can continue to move higher considering the current favorable economic backdrop along with strategic initiatives by these companies.
He says these fast food giants are helping themselves by focusing on digital initiatives that attract and maintain a younger and more loyal following.
“Whether it’s the kiosks and all-day breakfast at McDonald’s; whether it’s mobile ordering and digital loyalty at Starbucks [or] healthier options at Chipotle, these companies are remaining relevant with younger customers and becoming more efficient on the cost side,” Chiavarone said.
“The best bet in the market right now is the U.S. consumer,” he said, and these stocks are profiting on the trend.
Chipotle has been “flexing their digital muscle” according to Goldman Sachs’ Katherine Fogertey, and it’s paying off. Digital sales grew 99% in the burrito chain’s last quarter, making up just over 18% of total sales for the quarter.
Starbucks was able to deliver a top- and bottom-line beat in its latest quarterly report, reporting same-store sales growth of 6%, up from 1% in the same period last year.
Jim Cramer said that Starbucks CEO Kevin Johnson “recognized that if he could improve digital ordering, if he could solve the throughput problem, if he could make delivery happen, he could then orchestrate a magnificent turnaround, regardless of what the competition was up to.”
“Johnson rolled out all sorts of new technology to make it easier for you to buy his coffee,” Cramer said, and the CNBC host says that “the stock’s got more room to run” even after its surge so far this year.
McDonald’s shares hit all-time highs last week after the Big Mac maker reported same-store sales growth that topped estimates at 6.5%.
The company attributed the same-store sales growth to its success with deals like its 2 for $5 Mix and Match promotion as well as the positive impacts from its tech-focused store renovations.
McDonald’s has plans to spend roughly $1 billion in fiscal 2019 to modernize its American stores with self-order kiosks and other upgrades in the hopes of imitating the success it has seen in international markets with such tech-focused renovations.
But not everyone is so positive on these fast-food giants.
Blue Line Futures’ Bill Baruch says investors shouldn’t chase these stocks at their all-time highs.
“There’s a lot of momentum,” Baruch said, but he is staying “cautious” and warns that investors shouldn’t buy these stocks just for “fear of missing out.”
According to Baruch, the average directional index—which is used to determine how a chart or stock is trending—is flashing warning signals for Starbucks and Chipotle.
Starbucks’ ADX line “has hit a point where it’s exhausted in the past,” he said. And while Chipotle is “breaking out” now, Baruch says that trend may be about to reverse.