Summary: Leading hedge fund and mutual fund managers that have a long-term track record of generating high alpha are generally bullish on the restaurant group. Their best picks in the restaurant industry are fast food restaurant chain company Yum! Brands Inc. (NYSE:YUM), and casual dining restaurant chains Cheesecake Factory Inc. (NASDAQ:CAKE) and Brinker International (NYSE:EAT).
What are the top new buy and sell ideas of high alpha generating funds in the restaurant group? In this article, through research of the latest available institutional 13-F and 13-D/G (5% ownership) filings (as recent as ten days old), we identify the stocks in this group that were most bought and sold by a select group of high alpha generating funds numbering less than 100. This select list represents less than one-half of one percent of the total number of U.S. equity investment funds, but together these high alpha or guru funds control almost ten percent of total U.S. equity discretionary fund assets. The credentials of each high alpha fund that justify its inclusion in this elite group were detailed in our previous articles.
The savvy investor may consider leveraging this information either as a starting point to conduct his or her own due diligence or even go as far as constructing a model diversified portfolio based on the high alpha fund best picks. The argument is that institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When high alpha generating or guru Institutional Investors by virtue of their fund performance, low volatility and elite reputation in the investment community, invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation.
This series is a follow-up to our previous series that identified top guru holdings by industry group. It updates that information for the most recent quarter, and identifies the stocks in the group most bought and sold by guru funds during the quarter, their top holdings in the group, and the number of these funds that hold the stock. Based on this analysis, we determined that guru funds are slightly under-weight in the restaurant group by a factor of 0.86, that is, they would have to hold 16% more assets in the group to be equal-weighted. The following are their top buys, sells and holdings:
- Yum! Brands Inc. (YUM) is an International fast-food restaurant company, franchisee and operator of 37,835 fast-food restaurants including Pizza Hut, Taco Bell and KFC in over 110 countries. Eleven guru funds own $2.53 billion or 10.0% of the outstanding shares in YUM. However, guru funds have recently been selling as their holdings went down $424 million during the quarter with six guru funds cutting their position and two adding to it during the quarter. Of the $2.53 billion in YUM stock held by guru funds, Longleaf Mutual Funds ($1.52 billion), Lone Pine Capital LLC ($536 million), Viking Global Investors LP ($295 million) and Legg Mason Capital Management ($129 million) own the most shares. YUM trades at a forward price-to-earnings (P/E) ratio of 14, in the middle of its historic P/E range. Analyst targets are in the high-$50s to low-$60s, a slight premium over current levels; and of the 21 analysts covering the stock, ten rate it a buy/strong buy, eleven a hold and none a sell. While the stock appears fairly priced, the long-term fundamentals and growth story are still intact and YUM remains an attractive buy. It is more of a play on China than the U.S. as in 2010 YUM generated more earnings from its China operations than in the U.S., even though Chinese sales were just 20% of U.S. sales. This is because YUM owns and operates the majority of its restaurants in China, whereas in the rest of the world franchising is the method of choice. We would not rush into YUM due to its premium valuation, but would buyers on any dip into the low-$50s.
- McDonalds Corp. (NYSE:MCD), together with its subsidiaries, operates as a worldwide food-service retailer. It franchises and operates McDonald's restaurants that offer various food items, soft drinks, coffee, and other beverages. Taken together, guru funds are bullish on MCD, and they added a net $101 million to their $245 million prior quarter position. Eight guru funds increased their position, and only one reduced it. The guru funds that added to their position include Kingdon Capital Management LLC ($59 million), Oakmark Funds ($17 million), Zweig-DiMenna Associates ($14 million), SAC Capital Advisors LP ($6 million), Glenhill Advisors LLC ($6 million), Driehaus Capital Management ($4.5 million), Al Frank Asset Management ($1 million) and Fisher Asset Management LLC ($1 million). MCD trades at a forward 15 P/E, at the top of its P/E range. Of the 25 analysts covering the stock, 16 rate it a buy/strong buy, nine a hold and there are no sell ratings. Analyst ratings, however, are in the $90 range, only slightly above current levels. We feel that MCD is currently fully priced, and although its fundamentals keep improving, there is limited additional upside based on current fundamentals. Furthermore, gurus probably bought MCD in the mid-$70s, where it was attractively priced, before the current surge.
- Cheesecake Factory Inc. (CAKE) is an operator of 150 Cheesecake Factory restaurants, 13 Grand Lux Cafes, and One Rocksugar Pan Asian Kitchen in 35 states. Taken together, guru funds are bullish on CAKE as they added a net $23 million to their $129 million prior quarter position. Guru funds now control 8.2% of the outstanding shares of CAKE, and the ones with the largest additions to their CAKE portfolio include Tremblant Capital Group ($27 million) and GAMCO Investors ($7 million). CAKE trades at forward 17 P/E, near the middle of its historic P/E range. Of the 26 analysts covering the company, 12 rate it a buy/strong buy, 14 a hold, and none at a sell, and analyst targets are in the mid- to high-$30s, a slight upside from current levels. We believe CAKE is attractively priced at current levels.
- Brinker International (EAT) operates 1,550 Chilis’ and Maggiano’s restaurants in 30 countries. Taken together, guru funds are bullish on EAT, and they added a net $36 million to their $46 million prior quarter position. Three guru funds increased their position, and none reduced it. The guru funds that added to their position include Hussman Econometrics Advisors ($23 million), SAC Capital Advisors LP ($4 million), Fisher Asset Management ($1.3 million), Driehaus Capital Management ($1 million) and Balyasny Asset Management LLC ($0.9 million). EAT is currently trading at a forward 14 P/E, in the bottom 1/3rd of its historic range. Of the 20 analysts covering the stock, six rate it a buy/strong buy, eleven a hold and the remaining three at underperform, and analyst targets are in the $30 range, a modest upside from current levels. We believe EAT to be an attractive long-term play in the casual dining segment.
- Panera Bread Cla (NASDAQ:PNRA) is an international bakery-café restaurant and a franchisee and operator of 1,453 bakery-cafes in 40 states, D.C. and Canada. Taken together, guru funds are bullish on PNRA, and they added a net $16 million to their $46 million prior quarter position, now holding 5.2% of the outstanding shares in the company. Two guru funds increased their position, and one reduced it. The guru funds that added to their position include SAC Capital Advisors LP ($14.5 million) and Balyasny Asset Management LLC ($8 million); hedge fund Kingdon Capital Management LLC reduced its position by $6 million. PNRA is currently trading at a forward 24 P/E, near the top of its historic P/E range. We believe the stock is fully priced at current levels, and gurus probably bought into this stock before the February surge at much lower levels. Of the 20 analysts covering the stock, 15 rate it a buy/strong buy, eight a hold, and only one at underperform. Furthermore, analyst targets are in the $130-$150 range.
- DineEquity Inc. (NYSE:DIN) is a franchisee, licensee and operates of 3,514 IHOP and Applebee's Restaurants. Taken together, guru funds are bullish on DINE, and they added a net $8 million to their $238 million prior quarter position, now holding 27.6% of the outstanding shares in the company. One guru fund increased his position, and one reduced it; namely SAC Capital Advisors LP added $16 million to its position and Keeley Asset Management Corp cut $9 million. DIN is currently trading at a forward 12 P/E while earnings are projected to flatten out, rising from $3.50 in 2010, to $4.52 in 2011, but dropping to $4.23 in 2012. Of the six analysts covering the stock, four rate it a buy/strong buy, two a hold, and none rate it underperform/sell. Furthermore, analyst targets are in the $55-$65 range. We would not be buyers here in the low-$50s.
- Jack in the Box Inc. (NASDAQ:JACK) operates 2,731 Jack in the Box and Qdoba Mexican Grill restaurants. Taken together, guru funds are bearish on this fast food restaurant chain, and they cut a net $15 million from their $79 million prior quarter position. Fisher Asset Management LLC sold $15 million and Legg Mason Capital Management sold $1.3 million worth of stock. JACK is currently trading at a forward 12 P/E while earnings are projected to recover to $1.88 by 2012 but still be well short of the $2.30 earned by the company in 2009. Of the 14 analysts covering the stock, five rate it a buy/strong buy, seven a hold, and two rate it underperform. Furthermore, analyst targets are in the $18-$28 range. We would be neither buyers nor sellers of JACK at these levels.
- PF Changs China Bistro (NASDAQ:PFCB) is an operator of 369 PF Chang's Bistros and Pei Wei restaurants. Taken together, guru funds are bullish on PFCB, and they added a net $11 million to their $20 million prior quarter position, now holding 3.4% of the outstanding shares in the company. Four guru funds increased their position, and one reduced it. The guru funds that added to their position include Hussman Econometrics Advisors Inc. ($8.5 million), SAC Capital Advisors LP ($4 million), Royce & Associates LLC ($1.3 million) and Gotham Asset Management LLC ($0.5 million); hedge fund Balyasny Asset Management LLC reduced its position by $4 million. PFCB is currently trading at a forward 17 P/E, mid-range based on its historic P/E range, while earnings are projected to grow modestly from $2.01 in 2010 to $2.41 in 2012. Also, the company recently missed analyst estimates for the March 2011 quarter, and it has indicated that it expects to experience higher commodity costs and increased labor wage rates, as well as higher G&A expenses due to higher share-based compensation expenses, in 2011. We would not be buyers of PFCB right now.
- Wendys/Arby's Group, Inc. (NASDAQ:WEN) franchises and operates 10,255 Wendy’s and Arby’s fast food restaurants in the U.S. and 22 countries worldwide. Two guru funds sold out of this fast food chain, cutting $20 million from its $245 million prior quarter position. SAC Capital Advisors LP sold $18 million and Kingdon Capital Management LLC sold $1.3 million worth of stock during the quarter. WEN is currently trading at a forward 26 P/E, while earnings are projected to rise strongly from 14c in 2010 to 19c in 2012. Of the 18 analysts covering the stock, eight rate it a buy/strong buy, eight a hold, and two rate it underperform/sell. Furthermore, analyst targets are in the $4-$8 range, which are likely to go up as recent news about the company selling Arby’s to a private equity firm gets baked into analyst price targets. We would not be sellers here, but neither would we be buyers of WEN due to its premium valuation based on current low earnings.
Market Value of Guru Fund Holdings
Guru Fund New Buys
Guru Fund New Sells
Number of Guru Funds in Stock
Top Buys and Sells
Yum! Brands Inc
Cheesecake Factory Inc.
Brinker Intl Inc.
Panera Bread Co.
Wendys/Arbys Group Inc.
Chipotle Mexican Grill Inc.
Dominos Pizza Inc.
Jack In The Box Inc.
P F Changs China Bistro Inc.
Top Guru Fund Holdings
Einstein Noah Restaurant
Other Stocks Held by Three or More Guru Funds
Bob Evans Farms Inc.
California Pizza Kitchen Inc.
BJS Restaurants Inc.
Red Robin Gourmet Burgers
Peets Coffee & Tea Inc.
Ruby Tuesday Inc.
Cracker Barrel Old Country Store
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.