Throw This Stock Away

The house rules are simple in this weekly column.

  • I bash a stock that I think is heading lower.
  • I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Wendy's (NYSE: WEN  ) .

Not so hot and not so juicy
Shares of the country's third-largest burger flipper hit a new 52-week high this morning, but it's just not worth it.

The chain finally completed the fire sale of a majority stake in its Arby's albatross this week -- and shortened its name in the process -- but are we sure we want to see all of the cracked eggs here in the basket of the only major burger chain to blow breakfast?

Wendy's hasn't been the same since the "chili finger," Dave Thomas' passing, or its botched breakfast menu. Feel free to choose your own "jump the shark" moment, and I won't necessarily be disagreeing with you if you go all the way back to Clara "Where's the beef?" Peller.

For starters, it's not as if Wendy's was a shiny speedster pitted against the Arby's slacker. Both chains have been stuck in the mud in recent years. Just check out the restaurant count.

Year

Wendy's

Arby's

2007 6,645 3,688
2008 6,630 3,756
2009 6,541 3,718
2010 6,576 3,649

 Source: 2010 annual report.

Store-level performance has been unimpressive. Did anyone really believe that sea salt fries would cause traffic jams at the drive-thru window?

Analysts see Wendy's earning $0.13 a share this year, short of the $0.14 a share it earned last year and the $0.16 a share the pros were targeting just three months ago.

At least Burger King had the decency to be taken private so public investors wouldn't have to suffer through its meandering ways. It's hard to see how Wendy's will be any more relevant in the coming years.

You know what's growing? The upstarts with a cult following for the quality of their burgers. West Coast icon In-N-Out recently expanded into Texas. Virginia's Five Guys is aiming to open about 300 new stores this year. Throw in the growing popularity of food trucks and gourmet burger joints, and you have Wendy's fading -- only now as an old maid.

Don't hold out too much hope for Dave's Hot 'n Juicy -- the premium burger line that Wendy's wants to introduce later this year -- to win back diners. Sprinkling sea salt on natural-cut fries didn't help last year. Tossing berries into a salad isn't helping now. The crowded marketplace has changed, and Wendy's is about to find out that there are things far worse than stagnancy.

A new high today? Ha!

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

  • McDonald's (NYSE: MCD  ) : This is an obvious choice, but Mickey D's is the only burger chain that has successfully broadened its menu with its "barbell" pricing approach, balancing bargain and premium offers, without alienating patrons. Revenue is growing several times faster than Wendy's. McDonald's is also trading at 17 times this year's projected profitability and 15 times next year's target. This isn't necessarily cheap given the chain's maturity, but it's a bargain when stacked against Wendy's. One also has to give the chain props for taking on Starbucks (Nasdaq: SBUX  ) in premium coffee and Jamba (Nasdaq: JMBA  ) in fruit smoothies without embarrassing itself.   
  • Chipotle Mexican Grill (NYSE: CMG  ) : Another quick-service chain hitting a new high today is the fast-growing burrito roller. Chipotle isn't cheap, as it now fetches nearly 40 times next year's earnings. But Chipotle's growth, impressive streak of blowing past Wall Street's guesstimates for 10 consecutive quarters, and the potential of the Asian concept it will debut this summer are worth the hefty markup. Wendy's tried to give fresh Mex a try, but ultimately had to dump its Baja Fresh concept.
  • Tim Hortons (NYSE: THI  ) : Shares of Tim Hortons have doubled since being spun off by Wendy's five years ago. Wendy's has given back two-thirds of its value in that time. The Canadian coffee and baked treats specialist lost its CEO two months ago, but there's little reason to expect the company's modest yet consistent growth to suffer.

I'm sorry, Wendy's. After watching you miss Wall Street expectations this past quarter and simply meet estimates the quarter before that, I have just three words for you: Where's the beat?

The Motley Fool owns shares of Chipotle and Starbucks. Motley Fool newsletter services have recommended buying shares of Tim Hortons, McDonald's, Chipotle, and Starbucks. Motley Fool newsletter services have recommended creating an iron condor position in Chipotle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz doesn't mind taking out the garbage every so often. He does not own any of the stocks in this story, except for Jamba. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 07, 2011, at 3:27 PM, jokesonyou wrote:

    I began reading your article thinking it would be a serious and original article. Two paragraphs into the blog I thought I was reading something I had previously read just three days ago regarding 52 week highs.

    Wendy's will grow and the meals will improve the revenue flow. There is no comparison to McDonold's or Tim Horton, Star Bucks or Jamba. If it wasn't for Ronald McDonald the clown and parents growing up with Hamburglar and the others McDs wouldn't have stood a chance even against The King. Wendy's gives better quality and is always cleaner. These things attract customers. I doubt your ability to foretell the future of Wendy's ability to attract customers with new menu or with their expansion plans. Todays 52 week high in the next two years just might become the 52 week low therefore I will hold on and add to my portfolio, thank you very much.

    How about some new information regards the international expansion and how that will affect the bottom line?

  • Report this Comment On July 07, 2011, at 7:54 PM, DrRonPaul4Prez wrote:

    @jokesonyou I was thinking about the international expansion efforts as I read this too. I'm a holder too, and I hope the author is wrong, but I have to respect him for making his point. I don't see this as a sure-fire win, but I do see it as a pretty good chance stock, and for what it's worth I'm planning to stay in for now.

  • Report this Comment On July 07, 2011, at 8:17 PM, Riskysam wrote:

    i'll take you seriously when you drop the jamba juice.

  • Report this Comment On July 08, 2011, at 11:20 AM, santucci44 wrote:

    I agree. Wendy's burgers are considered to be on the high end of the fast food burger offerings. Therefore, with the encroachment by the boutique burgers like 5 Guys, they will continue to lose market share in that product segment. Their breakfast launch will likely only account for 3% of a store's sales. The new store development costs relative to their low average store volumes and very high and will restrict their domestic expansion because they won't be able to get a acceptable ROI. As far as international expansion, I don't think the Wendy's band has much identity abroad and their product line is too bland to create much of a stir. My guess is that you will see a very marginal improvement over the next year and a new CEO.

  • Report this Comment On July 08, 2011, at 12:57 PM, LorynToo wrote:

    I sure hope the rest of your advice is better than this one. I've been watching Wendy's stock for years and finally got in. Unlike McDonald's, their BOD are not pulling down multimillion dollar salaries. The price is right for a stock, it always has dividends and their product is good. I have to drive 50 miles to get to a Wendy's, but any time I'm in that neck of the woods, I go. McDonald's just opened a store a mile from me, but after three weeks, I'm tired of them. The other two chains I never expect to see.

  • Report this Comment On July 08, 2011, at 7:52 PM, kayaker27 wrote:

    Better burgers than McDonald's. Better salad's than Burger King. Cheaper than 5 Guys AND DO you really want to eat at a place called N AND OUT ??? Finally free of Arby's a $5 stock that kids can own and dine all wrapped up in the same place.My 13 year old daughter owns stock in Wendy's. Long live DAVE......

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1516478, ~/Articles/ArticleHandler.aspx, 10/25/2014 7:26:21 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement