This $709 Billion Sub-Trend Could Make Your Portfolio Pop

Keith Fitz-Gerald Oct 02, 2015
25 

Sometimes a big trend isn’t little enough – what I mean by that is that a big trend may not be as focused as you’d like. To really refine your profit potential, you’ve got to hone in on a sub-trend.

We’re going to talk about that today and, specifically, how recent trading conditions have created an opening that most people don’t see in a sub-trend driving one of the most powerful of our Unstoppable Trends of all – Demographics.

That sounds like a tall order but it’s not too hard if you know what to look for.

The last time I brought one of these sub-trends to your attention, Total Wealth readers who followed along had the opportunity to capture returns of 120.40% in less than nine months.

The opportunity I want to share with you right now could do even better…and even faster.

The key is something called “fast-casual” dining.

This Sub-Trend Has Already Created Millionaires – It’s Your Turn

Let me set the stage.

Team Yellen insists that there’s a recovery underway and the Fed highlights falling unemployment and steadily increasing economic growth as a declaration that they’re doing their job.

You and I both know that’s not true for reasons we’ve talked about many times.

Case in point, a tight labor market would be characterized by higher wages and rising prices. Yet, wages are flat to falling, median household wealth continues to decline, and the percentage of working age Americans with jobs is still below pre-recession levels. The most damning data of all, underemployment – meaning people who want to work full time but who are forced to work part time – is still near record highs.

Not surprisingly the Congressional Budget Office continues to lower growth projections most recently dropping annual U.S. growth projections to just 2.0% in an August update to the Budget and Economic Outlook 2015 to 2025.

Now, here’s where it gets interesting.

If you really pull apart the wage data you see a very clear dividing line between high-wage, middle-wage and low-wage jobs.

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What this tells me is that the nature of spending has changed and will continue to change, especially when it comes to how Americans like to reward themselves, because that’s where the bulk of discretionary spending occurs, especially when it comes to eating out.

It used to be that Americans went to fancy restaurants all the time. High-end joints were all the rage for birthdays, anniversaries, parties, and much more. But now with wages crimped, that’s changed.

Americans still go out to eat, just not to white table cloth restaurants like they used to. Instead, they’ve turned to something called “fast-casual” dining. Think Chipotle Inc. (NYSE:CMG), Panera Bread Company (NasdaqGS:PNRA), and even Shake Shack Inc. (NYSE:SHAK) here. Not Mortons.

They’re still cheap, casual dining environments. But they’re a step up from fast food and the change has been so pronounced that it’s left that industry in the dust.

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It’s a fundamental change in America’s $709 billion restaurant sector and I want you to be ready to capture the next leg up.

Analysts Have Given You Another Fabulous Entry Point

One of the most compelling – albeit highly speculative – plays right now in fast casual dining is Dunkin’ Brands Group Inc. (NasdaqGS:DNKN).

I know that the company may seem like an odd choice given that it’s being torn apart by the investing public right now in the media. But hear me out.

First, the stock got trashed yesterday, falling more than 12% by the end of trading. The cause? Dunkin’ Donuts saw its Q3/2015 same-store sales rise 1.1%, but traders punished it merely because analysts had expected 2.6%.

That alone screams opportunity. The headlines should have read, “Analysts Got It Wrong, Again.”

We’ve talked before about how nonsensical it is for investors to define success or failure by what analysts think. They’re conflicted, they’re frequently talking up their own book, and they’re often totally unqualified to run a business let alone analyze the sectors they’re charged with.

Worse, traditional Wall Street analysts as a whole tend to underestimate earnings after sharp corrections but consistently overestimate earnings potential as markets mature. You can see that quite clearly in this chart from Deutsche Bank.

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You’ll recall that we saw a similar situation with Chipotle last April, when the stock tanked more than 7% after the company reported same-store sales growth of “only” 10.4%, in contrast to the 11.8% analysts were predicting.

The situation was so ludicrous to me I even devised a play for Total Wealth readers that was based on it, urging you to make analysts your secret weapon by acting on the entry point in Chipotle they unwittingly created.

Anyone who followed along had the opportunity to capture gains of 16.59% since April 29 – no small feat in today’s markets. The S&P 500 has dropped by -7.75% by comparison.

Source: Yahoo! Finance

Source: Yahoo! Finance

After yesterday’s selloff, Dunkin’ Donuts sports a price-to-earnings (PE) ratio of just 25, which is barely half of Chipotle’s. That’s important considering that the company is one of the largest coffee and baked goods operators worldwide with more than 11,000 units in operation according to National Restaurant News, and a planned 6,000 on the board.

I’m particularly excited about the company’s view on China. Dunkin’ opened its first restaurant in Shanghai in 2008, had about 50 locations by 2014 and now has plans for another 1,400 stores in China over the next 20 years.

The situation reminds me of how Dunkin’ entered South Korea, which now accounts for 40% of the company’s international sales and 900 locations.

Factor in DNKN’s conscientious efforts to become more like Starbucks both in terms of the products and the ambiance it creates, and I believe management has a very clear understanding of what’s needed to succeed when it comes to the fast-casual dining segment.

By the way, the next time you’re in South Korea, check out the newly introduced 1945 Legend White Creamy. And, let me know how you like it.

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Until next time,

Keith

25 Responses to This $709 Billion Sub-Trend Could Make Your Portfolio Pop

  1. R. J. says:

    Very nice analysis.

    Wow. DNKN is very near it’s one-year low.

    So let Dunkin’ patrons acquire a sugar high and then contract type II diabetes from ingesting all of Dunkin’s sugar, while investors can eat up some sugar-free stock and hopefully see a profit 🙂

    • Keith says:

      Thanks for the kind words, RJ.

      And yes, sugar free profits would be great!

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  2. Tom B says:

    Keith:

    Very interesting charts I have never seen before (those alone are worth reading the article), and I agree Dunkin “could” be a bargain after the undeserved selloff last night. But how in the world does a discussion of “fast casual restaurant trends” and DNKN go together in the same article? I thought you were going to tell me something I did not know like DNKN has a fast growing subsidiary that is in the fast casual space. Like Jack in the Box and its Qdobo fast casual Mexican subsidiary. In the shops I have seen and occasionally visit in the US, they in no way resemble the “ambience of Starbucks” and are still the favorite stop for truck drivers and factory workers (the few that are left). Or maybe the subway-train riders in the NY-Connecticut corridor. What am I missing? A misplaced subsector classification for the stock in some index?

    And your hopes for DNKN in China? As soon as they get big enough to threaten the millions of existing local sweets vendors in China, the government will shut them down for some supplier quality or other trumped up issue. Success in S. Korea has no relevance to their potential in mainland China, and I have lived in both countries. The business climate and the people are very different.

    • Keith says:

      Hi Tom.

      Thanks for the kind words. I try very hard to bring information to everybody’s attention that matters and it’s great to get feedback like yours!

      As for Dunkin…perhaps I didn’t give it enough attention in the article but you know like I do from first hand experience that restaurants like Dunkin localize their menus, especially in the fast casual space. I am particularly excited by the sandwiches, coffee and other faire I see abroad. I hope we have the opportunity to compare notes sometime.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

    • Mike in LV says:

      Tom b.:

      Your comment that China would shut down DNKN because it threatens local businesses is thoughtless. Just because you lived in China does not qualify you as a credible source. The Chinese government would shut down a local vendor before it would do the same to a multinational chain like DNKN or Starbucks. It has worked too hard over the years to gain foreigners’ trust that China is a place to do business.

  3. Robert in Vancouver says:

    I’m not sure that the rest of the world will embrace Dunkin Doughnuts pastries like the USA does.

    For example, Dunkin came to Canada but we found the doughnuts and other pastries overloaded with sweet glazings, sweet creams, and gobs of sugar. Dunkin folded and left Canada in a few months. I don’t think many other cultures will enjoy pastries that taste like pure sugar.

    • Keith says:

      Hi Robert.

      I think that’s a very valid concern. My understanding of what they’re trying to do is adopt a more Tim Horton-like approach. We will definitely see.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  4. Paparas Mokis Ahabh says:

    I wish to meaningfully participate in the big happenning

  5. Len says:

    What can you say about KRISPY KREAM AND ITS SUGAR HIGH FIX ???

    • Keith says:

      Hi Len.

      The dynamic certainly seems similar but Krispy Kreme, seems to me, has never successfully adapted the way Dunkin Brands appears to be trying to.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  6. Jeff says:

    Investor Alert: Investigation of Dunkin’ Brands Group Announced by Holzer & Holzer, LLC

    Is it typical for a law firm to investigate a company after Analyst’s forecasts are dead wrong?

    • Keith says:

      Hello Jeff.

      That’s a very good and astute question. These days many law firms simply launch an investigation. Sometimes it’s legitimate but at others it’s just a testing of the waters so to speak to see if there’s some sort of shake-down potential. Most wind up dead ends.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  7. Reuben D says:

    You mention Chipotle Inc. in the article; would it make sense to put 1% of my portfolio into Dunkin as well as 1% into Chipotle to diversify and to limit risk? Or would you recommend a different company and different percentage? To me Chipotle seems healthier. But with both I could be sugar free as well as GMO free.

    • Keith says:

      Hello Rueben.

      Unfortunately, it would be inappropriate for me to answer because I am not familiar with your personal risk tolerances and objectives. What may be a speculative investment could be a core holding for another investor. I could make the case for either company.

      Let me wind up by commending you for your thinking and the 1% position sizing – that shows some really savvy and intelligence!

      Well done!

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  8. Trevor Thistle says:

    If DD are modeling their business similiar to that of Tim Hortons in Canada, they will do very well. Tim Hortons offers excellent value in good food with relatively low prices. If DD does it right, they is some large potential to cash in.

    • Keith says:

      Hi Trevor.

      I share your line of reasoning and think that’s a very sharp observation on your part.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  9. Trinh nguyrn says:

    Keith
    I have to disagree with your recommendation of dnkn totally base on taste. There is a beautiful new shop jopen by our home and for the last 6 months; I hardly see any customers there. I go in there and I am the only customer; when they have a free coffee offer it’s so terrible that non of my family will even pay for the gas to go. Honestly I think that shop will close soon…I

  10. Houyhnhnm says:

    Maybe China will save the day for DNKN, but I’m very skeptical they can rebrand themselves as the next Panera in the U.S. I generally stay away from stocks that depend on the fickle tastes of the public, and in this area I’d be willing to pay up for the top brands such as Starbucks, Panera and Chipotle. The higher P/Es do mean higher risk, but I think branding is better insurance against quick collapse than a lower P/E.

    Disclosure: long Starbucks

    Houyhnhnm

  11. Don Gleichman says:

    I call my local Dunkin DuMkin. Have trouble getting order correct !!

  12. PAul says:

    DD makes such good bagels that it has put lots of bagel shops out of biz
    Now their egg sandwiches are quite tasty and more heathy than other fast food breakfast
    Fare. Have little doubt they will continue to adapt and hopefully avoid foolish acquisitions
    Like Baskin Robbins

  13. Dave says:

    While I can see the logic in this move. I am put off by other predictions by money morning articles pridicting an economic meltdown. What effect will that have on these companies and stocks?

    • Keith says:

      Hello Dave.

      I totally get where you are coming from. The key with any publication, including our own Money Morning, is to really evaluate the message. Our editors don’t necessarily agree on everything.

      My view is that every stock will come under pressure if there’s a meltdown yet, as bad as that sounds, history shows beyond any shadow of a doubt that the markets have an upward bias. That, in turn, suggests you want to buy when other are heading for the exits which is, not coincidentally, something the greatest investment minds of our time do very successfully for the same reason including Warren Buffett, the legendary Jim Rogers and the late Sir John Templeton to name a few. Of course, managing your risk like a hawk is essential, too.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

      • Dave says:

        I can agree with that. On another note. I live in Australia. Where we have sunshine 8 days out of 7 ( Its raining at the moment) We have been going through a big solar panel craze . With battery storage advancement and prospect of affordable electric cars and boats becoming a reality. I would love to read some investment advice towards this sector.
        Regards. Dave

  14. Kenneth Powers says:

    I have recently enrolled in High Velocity. L will be going on vacation this week, and when I return I would like to chat ith an adviser about myself as a beginning trader. I have very impressed with some of the email pertaining to trading
    strategy. Mr. Futz-Gerald, I would need to begin small, and with short returns to start, If I could qualify that way.

    Thanks,

    Ken Powers

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