Trust Your Eyes, Not Your Ears


Trust your eyes, not your ears.

– Zacks

The financial markets have evolved over the years but one thing has remained the same – human behavior. Institutions as well as individual investors buy and sell stocks based on a host of differing strategies, but all of the reasons why a stock is moving up or down can be summed up by viewing a stock’s buying pressure against its selling pressure. At the end of the day, if more shares are being bought at consecutively higher prices, the stock will move up. If more shares are being sold at lower prices, the stock will move down.

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

If we can quantitatively measure a stock’s buying pressure versus its selling pressure, we can know in advance which direction the stock is likely to move. This is very different from predicting which direction a stock will take. In the investing world, predictions can get you into a whole world of trouble. We’re not in the business of making predictions – we’re 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 has been beaten up recently and it’s time for a turnaround.” The problem with this crystal ball type of approach is that these investors are trying to predict the future. We can compare this with attempting to catch a falling dagger. You would rather let it hit the ground than stick your hand out and hope to catch the handle, right? Investing is no different. A safer approach would involve allowing a stock to bottom out, showing signs of a reversal and legging into the position.

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 fantastic tool for viewing the price trend of a stock, and it is this price trend that will assist us in making buy and sell decisions. It’s mind-boggling that even today some professional money managers don’t use charts when managing money. Investing without the use of charts is akin to throwing darts at dart board blindfolded – they are almost guaranteed to miss! Even if they hit the board, they will most likely be nowhere near the bullseye.

Human behavior dictates market movement – it always has and always will. And human behavior hasn’t changed much over the course of history. Greed, hope, and fear are human emotions that work their way into buy and sell decisions. Chart patterns are the effect of these decisions. As investors, we want to identify the strongest stocks that are in the most powerful uptrends, which serve as a clear indication that buying pressure is exceeding selling pressure.

In addition to viewing price trends, Zacks charting software provides investors with the capability of overlaying consensus earnings estimates and EPS surprises over the price trend which enables them to see the entire investment picture. Over time, stocks typically follow the direction that earnings take. Our Zacks Rank system helps investors identify stocks that are seeing positive earnings estimate revision activity before major price moves.

With this in mind, let’s identify three restaurant stocks whose buying pressure is exceeding selling pressure and whose earnings have been steadily growing over time. All three stocks are part of the Zacks Retail and Wholesale sector, which is ranked #2 out of all 16 sectors.

Yum! Brands, Inc. (YUM)

Yum! Brands develops, operates, and franchises quick-service restaurants globally. YUM is the world’s largest restaurant company in terms of system units with over 50,000 restaurants in more than 150 countries and territories. YUM’s most well-known brands – KFC, Pizza Hut and Taco Bell – are the global leaders of the chicken, pizza and Mexican-style food categories. The company was founded in 1997 and is headquartered in Louisville, KY.

YUM has taken innovation to a new level with the acquisition of Dragontail, an AI-based integrated kitchen order management and delivery technology that continues to attract new customers. The company presently reports through four segments – KFC (40.2% of total revenues in 2020), Taco Bell (36%), Pizza Hut (17.7%) and Habit Burger Grill (6.1%). While revenues took a hit in 2020 due to the pandemic, growth picked back up in 2021. Revenues are expected to have surged 16.34% last year to $6.58 billion, and the Zacks Consensus Estimate for 2022 revenues calls for growth of 7.56% 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 has posted a trailing four-quarter average earnings surprise of +19.81%. YUM most recently reported EPS of $1.22 back in October, a +15.09% beat over consensus. YUM shares have risen 31% in the past year.

Yum Brands, Inc. Price, Consensus and EPS Surprise

Yum Brands, Inc. Price, Consensus and EPS Surprise

The Zacks Consensus Estimate for 2021 EPS stands at $4.50, translating to growth of 24.31% relative to 2020. YUM is slated for its next earnings report on February 3rd.

McDonalds Corp. (MCD)

McDonald’s is the world’s leading global food service retailer. The company’s international system is comprised of both company-owned and franchised restaurants with more than 39,000 locations in over 100 countries. Nearly 93% of the MCD restaurants are owned and operated by independent local business men and women. McDonald’s was founded in 1940 and is based in Chicago, IL.

A robust drive-thru presence and investments in delivery and digitization over the past few years have aided the company in countering the pandemic. The company’s strong brand recognition has helped it capture nearly 10% of the global informal-eating-out market. Notably, the company’s recently launched loyalty program in the U.S. has already enrolled more than one million members enrolled. MCD currently has loyalty programs in France and Germany as well with over 15 million active loyalty members earning rewards.

The company’s expansion efforts continue to drive performance. MCD has surpassed earnings estimates in each of the last three quarters and most recently reported EPS for the quarter ending in September 2021 of $2.76, a +12.2% surprise over consensus. The company has averaged a +6.8% positive earnings surprise over the last year, aiding the stock’s nearly 30% return over that timeframe.

McDonald’s Corporation Price, Consensus and EPS Surprise

McDonald's Corporation Price, Consensus and EPS Surprise

The Zacks Consensus Estimate for 2021 EPS has been revised upwards by 0.43% in the past 60 days to $9.42 – a staggering 55.7% growth rate versus 2020. MCD is due to report its final set of ’21 quarterly earnings later this month on January 27th.

Papa John’s International, Inc. (PZZA)

Papa John’s operates and franchises pizza delivery, carry-out restaurants, as well as dine-in locations in the U.S. and internationally. PZZA is the world’s third largest pizza delivery company and operates 5,569 restaurants, which includes 591 company-owned and 4,978 franchised restaurants in 50 countries and territories. Papa John’s was founded in 1984 and is headquartered in Louisville, KY.

A combination of product innovation, successful partnerships, international expansion and franchising initiatives have helped PZZA revenues exceed pre-pandemic highs. The company managed to hire 30,000 new team members during Q4 in 2020. Papa John’s continues to expand its digital ordering capabilities with the launch of Facebook Instant Ordering as well as a custom ordering app for Apple TV. Total revenues are expected to have risen 13.81% in 2021.

Zacks Investment ResearchImage Source: Zacks Investment Research

PZZA has beaten earnings estimates in each of the past three quarters while averaging a positive 27.2% surprise over the past year. The company most recently reported EPS of $0.83 in November, a +20.29% surprise over consensus. PZZA shares have outperformed the market in the last year with a 37.46% return.

Papa John’s International, Inc. Price, Consensus and EPS Surprise

Papa John's International, Inc. Price, Consensus and EPS Surprise

What the Zacks Model Reveals

The Zacks Earnings ESP (Expected Surprise Prediction) seeks to find companies that have recently seen positive earnings estimate revision activity. This more recent information can be very accurate and give investors a leg up during earnings season. In fact, when combining a Zacks Rank #3 or better with a positive Earnings ESP, stocks produced a positive surprise 70% of the time according to our 10-year backtest.

With a Zacks #3 rank and a +7.24% Earnings ESP, the trend of earnings beats for PZZA looks set to continue. Earnings are expected to have skyrocketed 142.14% in 2021 to $3.39. PZZA is scheduled to report its final slate of ’21 quarterly EPS on February 24th.

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

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