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.




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?

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.