Trust Your Eyes, Not Your Ears

Trust your eyes, not your ears.

– Zacks

Financial markets have evolved over the years but one thing has remained the same – human behaviour. Institutions as well as individual investors buy and sell stocks based on a combination of different strategies, but all the reasons why a stock might move up or down can be summed up by displaying stock buying pressure versus selling pressure. At the end of the day, if more shares are bought at higher prices in a row, the stock will go up. If more shares are sold at lower prices, the stock will fall.

Everything else is just noise. The financial media is full of uninformed opinions and “experts” who claim to know for sure where stocks are headed. The truth is, no one knows for sure what will happen in the future, and anyone who tells you otherwise cannot be trusted.

If we can quantitatively measure the stock’s buying pressure against the selling pressure, we can know in advance which direction the stock is in likely to to move. This is very different from anticipation Which direction will the stock take? In the world of investing, predictions can put you in a world full of trouble. We are not in the business of making predictions – we are in the business of making money.

Amateur investors will naively create reasons why a particular stock is worth buying, such as “the stock is cheap”, or “this stock was hit recently and it’s time to turn around.” The problem with this type of crystal ball approach is that these investors are trying to predict the future. We can compare this to trying to catch the fall of a dagger. You’d rather let it hit the ground than take out your hand and hope to grab the handle, wouldn’t you? Investing is no different. A safer approach might involve letting the stock pull back, showing signs of reversal and standing in the center.

The most effective way to measure buying and selling pressure is to view the daily price movement of a stock using price charts. Price charts are a great tool for showing the direction of a stock’s price, and it is this trend that will help us in making buying and selling decisions. It is mind-boggling that even today some professional money managers do not use charts when managing money. Investing without using charts is like throwing darts at a blindfolded dart board – you’re almost sure to miss it! Even if they hit the board, they likely wouldn’t be near the center of the target.

Human behavior controls the movement of the market – it has always been and always will be. And human behavior has not changed much throughout history. Greed, hope, and fear are the human emotions that make their way into buying and selling decisions. Chart patterns are the effect of these decisions. As investors, we want to identify the strongest stocks in the strongest uptrends, which serve as a clear indication that buying pressure exceeds selling pressure.

In addition to displaying price trends, Zacks charting software provides investors with the ability to overlay consensus earnings estimates and EPS surprises on price trend which enables them to see the entire investment picture. Over time, stocks usually follow the direction that earnings are taking. Our Zacks Rank system helps investors identify stocks that are experiencing positive earnings estimates review activity Before Major price movements.

With that in mind, let’s identify three restaurant stocks whose buying pressure exceeds selling pressure and whose dividends have steadily increased over time. All three stocks are part of the Zacks retail and wholesale sector, which ranks second out of all 16 sectors.

WL! Brands Inc (WL)

WL! Brands develop, operate and franchise quick service restaurants globally. YUM is the world’s largest modular restaurant company with more than 50,000 restaurants in more than 150 countries and regions. YUM’s most popular brands – KFC, Pizza Hut and Taco Bell – are global leaders in the chicken, pizza and Mexican food categories. The company was founded in 1997 and is headquartered in Louisville, Kentucky.

YUM has taken innovation to a new level with the acquisition of Dragontail, an AI-enabled integrated kitchen order management and delivery technology that continues to attract new customers. The company currently reports through four segments – Kentucky Fried Chicken (40.2% of total revenue in 2020), Taco Bell (36%), Pizza Hut (17.7%) and Habit Burger Grill (6.1%). While revenue was hit in 2020 by the pandemic, growth picked up again in 2021. Revenue is expected to rise 16.34% last year to $6.58 billion, and the Zacks Consensus estimate for 2022 revenue calls for 7.56% growth to $7.07 billion.

Zacks Investment ResearchImage source: Zacks Investment Research

YUM has exceeded earnings estimates in each of the past seven quarters. The company posted a surprise average fourth-quarter profit of +19.81%. YUM recently reported earnings per share of $1.22 in October, exceeding +15.09% on consensus. YUM shares are up 31% in the past year.

Yum Brands, Inc. Price, compatibility and EPS surprise

Yum Brands, Inc.  Price, compatibility and EPS surprise

Zacks consensus estimate for 2021 EPS stands at $4.50, which translates to 24.31% growth compared to 2020. YUM is due for its next earnings report on February 3rd.research and development.

McDonald’s Corporation (MCD)

McDonald’s is a leading global food service retailer. The company’s international system consists of company-owned and franchised restaurants with more than 39,000 locations in more than 100 countries. Roughly 93% of MCD restaurants are owned and operated by independent local businessmen and women. McDonald’s was founded in 1940 and is headquartered in Chicago, Illinois.

A strong presence and investments in delivery and digitization over the past few years have helped the company fight the pandemic. Strong brand recognition has helped the company capture nearly 10% of the global casual dining market. Notably, the loyalty program recently launched by the company in the United States has already registered more than one million members. MCD currently has loyalty programs in France and Germany as well as over 15 million active loyalty members who earn rewards.

The company’s expansion efforts continue to drive performance. MCD beat earnings estimates in each of the past three quarters and its latest earnings per share report for the quarter ending September 2021 came in at $2.76, which is a surprise 12.2% compared to the consensus. The company has averaged a surprising 6.8% positive earnings over the past year, helping its earnings per share by nearly 30% over that time frame.

McDonald’s Inc. Price, Compatibility and EPS Surprise

McDonald's Inc. Price, Compatibility and EPS Surprise

Zacks consensus estimate for 2021 EPS has been revised up 0.43% in the past 60 days to $9.42 – a staggering 55.7% growth rate over 2020. MCD is due to report its final batch of 21 quarterly earnings later in the year. This month on January 27.y.

Papa John’s International, Inc. (PZZA)

Papa John’s operates and franchises pizza delivery, takeaway restaurants, as well as dining locations in the United States and internationally. PZZA is the world’s third largest pizza delivery company and operates 5,569 restaurants, including 591 company-owned restaurants and 4,978 franchises in 50 countries and regions. Papa John’s was founded in 1984 and is headquartered in Louisville, Kentucky.

A combination of product innovation, successful partnerships, international expansion and franchise initiatives helped PZZA’s revenue exceed its pre-pandemic highs. The company recruited 30,000 new team members during the fourth quarter of 2020. Papa John’s continues to expand its digital ordering capabilities with the launch of Facebook Instant Ordering as well as an ordering app for Apple TV. Total revenue is expected to increase by 13.81% in 2021.

Zacks Investment ResearchImage source: Zacks Investment Research

PZZA has outperformed earnings estimates in each of the past three quarters while posting a positive surprise of 27.2% over the past year. The company recently reported an EPS of $0.83 in November, which is a surprise of 20.29% compared to the consensus. PZZA shares outperformed the market last year with a return of 37.46%.

Papa John’s International, Inc. Price, Compatibility & EPS Surprise

Papa John's International, Inc.  Price, Compatibility & EPS Surprise

What Zacks’ Model Reveals

Zacks Earnings ESP (Expect the Expected Surprise) seeks to find companies that have recently seen positive review activity to estimate earnings. This most up-to-date information can be very accurate and give investors a chance during earnings season. In fact, when combining a Zacks rating of #3 or better with a positive earnings ESP, the stock produced a positive surprise 70% of the time according to our 10-year backtest.

With Zacks #3 rating and +7.24% ESP, it looks like the PZZA earnings beat trend will continue. Earnings are expected to rise 142.14% in 2021 to $3.39. PZZA is scheduled to announce the final listing of its twenty-first quarter earnings per share on February 24y.

These three long-term restaurant winners prove that keeping pace with company earnings and price charts can guide investors to stocks that outperform the market.

Zacks Names “Single Best Pick to Double”

Out of thousands of stocks, 5 experts from Zacks each chose their favorite to skyrocket +100% or more in the coming months. Of these five, Research Director Shiraz Mian chooses someone with the most explosive positive side of all.

In the words of one investor, “Cure and prevent hundreds of diseases… what should this market be worth?” This company can rival or outperform other Zacks stocks that are set to double like Boston Beer which is up +143.0% in just over 9 months and NVIDIA which is booming +175.9% in one year.

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