It might be the industry you'd least expect, with the economy doing as well as it is. But the restaurant sector is in deep trouble.
Just look at the list of names that filed for bankruptcy in 2019: one of the largest Applebees' franchisees, RMH Franchise Holdings; Kona Grill; Bertucci's Holdings; Perkins Restaurant and Bakery; and Houlihan's. And that's with unemployment at a record low and consumer confidence close to a 20-year high.
It turns out there's an explanation for the recent struggles. And it's a bad sign for restaurant stocks across the board.
Fortunately, we can turn that into triple-digit profits by following a simple options trading strategy.
Here's what's going on - and how you can double your money on it...
Restaurant Stocks Are Being Disrupted
If you read the recent bankruptcy filings for these restaurants, you start to see a theme. They are citing third-party delivery services as a business headwind.
Firms like GrubHub Inc. (NYSE: GRUB), Uber Technologies Inc.'s (NYSE: UBER) UberEats, and DoorDash, among a slew of delivery startups, are eating into brick-and-mortar restaurant profits.
You might think these companies would help boost restaurant sales, but in reality, they are turning into an obstacle. Not only do they make it easy for potential customers to stay home, but they charge fees to the restaurants for offering the service.
Only 34% of customers between 34 and 54 say they are likely to dine out often, down from 41% in 2007. That's bad news for restaurants, since customers dining at home can't stay for a few rounds at the bar or decide to add a dessert after their meal. This lowers the average ticket price for the restaurant.
On top of that, delivery services charge restaurants a fee to offer their services. The average commission for an order placed through GrubHub can be as high as 15%. And that doesn't even include fees for reservation services like OpenTable, Yelp, and more.
For an industry with notoriously thin margins - the average is around 4% - this double blow could be the difference between profitability and bankruptcy.
It also means restaurants affected by this trend are walking on thin ice.
And we've found one that isn't just walking on thin ice, it's like driving a tank across thin ice.
Once the ice cracks, you could double your money by using this trading strategy.
The best part is you don't have to short the stock or take any unnecessary risk...
The Next Victim of the Restaurant Collapse
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
Consider the quick service restaurant chain called Wingstop Inc. (NASDAQ: WING), which, not surprisingly, specializes in chicken wings. Set with a nostalgic, 1930s and 1940s pre-jet aviation-theme, the company was founded in 1994 in Garland, Texas. Nearly all of its stores are franchised.
It sounds pretty good, especially during NFL playoff season.
Consider this, however: About three-quarters of its business is in the form of takeout, which makes it dependent on delivery services such as DoorDash, Grub Hub, and Uber Eats. As we saw before, these services take a big cut of the revenue.
That has not stopped Wingstop bulls from buying shares. From January 2017 through August 2019, the stock price more than tripled. Since then, it backed down from roughly $107 per share to its recent $91.70. But even so, its valuation is sky high with a trailing price/earnings ratio of 137. That's more than five times the average of the S&P 500. We might expect to pay that eye-watering valuation for a revolutionary tech firm, but not a restaurant chain.
Meanwhile, Wall Street is still fairly bullish on the stock, and only 10% of the float is sold short. But its days as a darling able to command a crazy valuation cannot last.
The company's debt has tripled since 2016 and doubled in the last year alone. It's closed 13% of its stores in the last two years, as its previously sturdy profits fell 20% in 2018 alone. We expect the stock to return to earth considering the trouble the sector is having.
And for the valuation to return to its historical average, shares would have to drop to $60.97. That's a cool 43% decline from current levels. And if the economy slows, the damage could be much worse.
The thing is that once the bloom is off the rose, when investors wake up to realize the company is in trouble, the price tends to sink like a stone. And that's why we think investors can make a killing with a simple options trade that gives the market time to figure out that the stock is way overvalued.
Buying a simple put option on Wingstop with an expiration in June and a strike price that is somewhat out of the money (below the current stock price) is a good way to play.
This means the majority of the value of your put option is time value. But that is necessary because we can't know exactly when Wall Street will wake up and reset this stock's valuation.
If the stock does fall to $60.97 by June, a put option with an $80 strike price, currently priced near $4, could soar to $20. And if it falls to $75.88 - Morningstar's "fair value" for the stock - you could still be looking at a profit of 100%.
And that's just one example of how trading options can inflate your bank account...
This Fast Money Move Could Make You $4,238
America's No.1 Pattern Trader is going live on camera to show readers how they can make hundreds, even thousands, of dollars in extra income.
You see, he's found a way to predict the future buying patterns of nearly every stock on the market. And with this trick, he's lining up major payday appointments left and right.
We're talking about cashing in on some of the biggest stocks on the market: Netflix, Apple, Facebook, even Amazon.
The best part is this options trading strategy is super easy to understand and even easier to put into action.
All it takes is three simple steps, a few clicks of your mouse, and you're on your way to what could be life-changing wealth...