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Wendy's (WEN) Joins Meme Stock Party: Will the Rally Continue?

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Breaking news and trends are highly influential in the stock market as these sway investor sentiments easily. At present, meme stocks are dominating the headlines. Shares of The Wendy's Company (WEN - Free Report) surged 25.9% on Jun 8, driven by bullish comments about the company by Reddit investing communities. Wendy’s is now the first fast-food “meme stock.” In fact, Reddit investing communities were recently responsible for the sharp increase in share prices of companies like GameStop Corp. (GME - Free Report) and AMC Entertainment Holdings, Inc. (AMC - Free Report) .

Following the sharp gain, Wendy's spokesperson told Yahoo Finance that “We’re aware of the unusual trading activity this morning and we’re closely monitoring.” In fact, Wendy's share price appreciation had a domino effect on other restaurant stocks like Wingstop Inc. (WING - Free Report) and Shake Shack Inc. (SHAK - Free Report) , whose shares gained 6.7% and 5.8% on Jun 8, respectively.

Meme stocks are mostly overpriced and experience spurts of rapid growth in short span of time. Sharp increase in price in most of the meme stocks overshadows their fundamentals. Thus, investors looking to add meme stocks to their portfolio will not only have to pay premium but also have to be ready for volatility. In the past three months, shares of the company have rallied 41.7% compared with the industry’s growth of 5.9%. Let’s delve deeper and find out whether Wendy’s can sustain its recent rally.

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Key Factors to Note

Despite the coronavirus pandemic, the Zacks Rank #2 (Buy) company has impressed investors with its robust global same-restaurant sales growth. After posting global same-restaurant sales growth of 4.3% and 4.7% in third and fourth-quarter 2020, respectively; the company reported global restaurants comps sales improvement of 13% in first-quarter fiscal 2021. Wendy's first-quarter fiscal 2021 global comps growth surpassed its own expectations. The upside was driven by strength in rest-of-day business, breakfast, digital and stimulus payments. Internationally, the company’s same-restaurant sales grew 7.9% in the fiscal first quarter owing to robust performance by the Canadian and Puerto Rico business. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Moreover, Wendy’s continues to focus on Breakfast daypart offerings to drive incremental sales. Ever since its launch on Mar 2, 2020, across the United States, the model has contributed 6.2%, 6.4% and 6.3% to U.S. systemwide same-restaurant sales during fiscal second, third and fourth-quarter fiscal 2020, respectively. During the fiscal fourth quarter, Breakfast remained solid at approximately 7% of sales. In first-quarter fiscal 2021, Breakfast accounted for nearly 7% of sales. It also contributed significantly to restaurant average unit volumes or AUV. Notably, the company has been benefiting from its marketing efforts, high-quality offerings, repeat ordering and high customer satisfaction levels. Going forward, it is bullish on this business model with plans to boost Breakfast daypart sales by 30% in 2021.

The company is also focusing on product innovation and technology developments to drive growth. Meanwhile, the practice of offering customized sandwiches made on order and serving hamburgers made of never-frozen beef are likely to continue to drive sales for the company. We expect the company’s solid menu pipeline, limited time offers (LTO), marketing initiatives and increased emphasis on core and price value offerings to aid it in maintaining the trend. Meanwhile, the company also intends to eliminate the use of gestation stalls from its pork supply chain by 2022. These efforts will make the company popular among health-conscious diners.

Wrapping Up

We believe Wendy’s strong fundamentals are likely to drive the stock further. Also, the company has increased its focus on smaller and efficient prototypes that is likely to pave the way for future prospects. For 2021, it anticipates global system-wide sales growth in the range of 8% to 10%.

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