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FOOD FIGHT! (SHAK,USFD)

Posted on August 20, 2019

You might think it odd that in the middle of the most furious trade row in a quarter century – at a time when consumer debt levels were peaking and the economy was at an apparent plateau – that fast food stocks would be faring so well.

Yet so it is.

Maybe because they’ve turned a new leaf and started offering healthier menu choices?

Maybe because a tapped-out citizenry turns to McDonald’s instead of Chateau Du Gros Homme when it comes time to dine out?

Maybe…

But however you slice it, KFC, Wendy’s, Taco Bell and the rest of the poison-serve industry have been positively soaring of late.

So much so, that we’re seeing extreme overbought reads on a great number of them.

Short ‘em!

On the other side of the coin, retail food distributors have been holding their own of late, too, turning in solid performances and barely dipping as the rest of the market swooned.

One such example is US Foods (NYSE:USFD), suppliers of grub to institutions and supermarkets across the land.

The company has a market cap of $8.5 billion, a P/E of 22.47 (forward P/E just 15.82) and a Price to Book ratio of 2.49.

More than that, it’s 99.70% institutionally owned!

Wait.  There’s more…

We’re aiming to pair an old stodgy like USFD against one of the aforementioned high fliers, a relative newcomer to the world of synthetic ingestibles called Shake Shack (NYSE:SHAK).

Here’s her daily chart from New Year’s –

Three items here bode ill for the shake maker –

  1. The stock doubled in value YTD and has recently begun a parabolic ascent (in red),
  2. RSI readings have hit the overbought 80 level twice in the last week (in green), and
  3. Yesterday’s trade brought a bearish engulfing pattern (in blue), as seen clearly in the blow-up.

All told, it appears the SHAK quacks have pushed the stock as high as it’ll go for now.

But before we get to our trade, a few more numbers to digest.

Consider –

SHAK sports a P/E ratio of 190 (!), with a forward P/E of 125.28, a P/B of 11.46 and has no, none, nada institutional ownership (0%).

What’s more, the amount of insider selling in the stock over the last six months is outright disturbing.

Insiders relieved themselves of almost 94% of their holdings in just the last half year!

And that doesn’t feel too promising.

Now have a gander at SHAK’s weekly chart paired with USFD –

The weekly chart is also indicating a wildly overbought condition (in green).  The last time this happened (exactly a year ago), SHAK lost three quarters of its value.

So how do we play it?

The spread between the two stocks is bound to close.  And we believe the best manner of gaming that outcome is as follows –

With kind regards,

Hugh L. O’Haynew

 

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