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It’s been a challenging year thus far for the restaurant industry, with dollars typically allocated to entertainment and a Friday night out wrestling to steal priority from rising gas bills, elevated energy costs, and higher mortgage rates.
Some restaurants have resorted to discounting to drive traffic, while others have relied on menu innovation and limited-time offers vs. promotional activities to protect their already softening margins.
(Source: Twitter, ND Wealth Management, Steve Deppe)
Those brands that are the most out of touch have continued to raise prices at a double-digit pace to ensure they maintain margins, with Chipotle (CMG) being one such offender. While this is likely to protect margins in the interim and allow the company to meet earnings estimates, it could backfire over the medium-term, with loyal customers feeling taken advantage of after being hit with consistent menu price increases in a recessionary environment.
Although this has made it difficult to invest in the sector, a few names are doing a great job navigating the current environment, and following recent share price weakness, they’ve slipped into undervalued territory.

One is a new breakfast chain that’s bucking the negative traffic trends in the casual dining space and enjoying industry-leading retention due to a key competitive advantage. The other is a pizza chain that’s enjoying strong unit growth, and while it’s having a tough year, annual EPS is forecasted to hit new all-time highs in FY2023 and FY2024.
Let’s take a look below:
First Watch Restaurant Group (FWRG)
First Watch Restaurant Group (FWRG) is a brand with over 450 restaurants serving breakfast in the United States, with a unique model being open from just 7 AM to 2:30 PM.
This has allowed the company to evade the industry-wide staffing issues, with its team members able to maintain a work-life balance, which isn’t possible for most restaurant brands.
In addition to solid staffing metrics that led the industry average, the company released blowout results in Q2, reporting traffic growth of 8.1% vs. an industry that saw negative 4% traffic in the quarter.
This translated to 20% system-wide sales growth ($231.2MM) and 13.4% same-restaurant sales growth, which trounced analyst estimates. The only negative in the report was that commodity costs came in higher than expected, stealing the sales leverage and leading to a 400 basis point decline in restaurant operating profit.
That said, this is still a very respectable figure, and the contraction in margins was largely due to being so conservative with pricing since the pandemic began. With the benefit of an overdue 3.9% price increase in July, I expect much of this margin pressure to abate.
(Source: FASTGraphs.com)
Despite this incredible sales performance in a quarter where traffic has been anemic, First Watch trades at a very reasonable valuation, sitting at just 10x FY2023 cash flow estimates. This might appear steep at first glance, but this business is growing units at a double-digit pace, making it one of the fastest-growing brands sector-wide.
Importantly, this growth is supported by growing average unit volumes, solid margins, and supportive staff, de-risking the growth profile vs. other brands. So, if this weakness in the stock persists, I would view any pullbacks below $14.40 (9.3x FY2023 cash flow) as a buying opportunity.
Papa John’s International (PZZA)
Papa John’s International (PZZA) is a mid-cap pizza chain in the restaurant space, and the company just came off a huge year, reporting record annual earnings per share of $3.43, a 145% increase from the year-ago period.
This was driven by impressive same-store sales growth, opportunistic share buybacks, and double-digit unit growth, an impressive feat for a company with over 5,000 restaurants globally (5,650 restaurants in 50 countries as of year-end 2021).
However, the company’s phenomenal year pinned it up against tough year-over-year comps, having to lap 145% earnings growth in a macro environment that’s much trickier to navigate. While the softened Q2 results were largely out of the company’s control, they came in below what the market was looking for, with revenue of just $522.7, a 5% increase over the year-ago period.
Meanwhile, although comparable sales in North America remained positive at 0.90%, International comparable sales dipped deeply into negative territory at (-) 8.0%.
While this is undoubtedly an ugly headline number, it’s important to contextualize the two figures. Although comp sales were down on a consolidated basis and fell sharply internationally, Papa John’s two-year stacked same-restaurant sales are sitting at 6.1% and 13.2%, respectively, with International (13.2%) having to lap a 21.2% growth rate in Q2 2022.
These are solid figures, but the deceleration combined with inflationary pressures that hit earnings (quarterly EPS: $0.74 vs. $0.93) has put a severe dent in the stock.
(Source: FASTGraphs.com)
The good news is that this 42% correction has left PZZA trading well below its 10-year average earnings multiple of 35, and even if annual EPS sinks year-over-year, it will still be up over 120% vs. FY2020 levels. More importantly, it’s expected to hit new highs in FY2023 and FY2024 based on current estimates of $3.71 and $4.08, respectively.

Hence, I see this aberration in this strong earnings trend as a buying opportunity. That said, the ideal buy point for PZZA comes in at $77.00 or lower, where it would trade at ~21x FY2023 earnings estimates vs. what I believe to be a fair value of $110.00 per share, translating to a 30% discount to fair value.
While FWRG and PZZA may not be in low-risk buy zones, these are two names with strong growth that have loyal customer bases, boast strong unit growth, and are temporary victims of their success. This is because their strong FY2021 resulted in them being up against nearly insurmountable comps this year.
Still, I see the future as bright for both brands and meaningful earnings growth on the horizon post-2022, so I would view pullbacks below $14.50 on FWRG and $77.00 on PZZA as buying opportunities.
Taylor DartINO.com Contributor
Disclaimer: This article is the opinion of the contributor themselves. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information in this writing.

The idea of pooling investment assets has been around for centuries. Mutual Funds first appeared in the 1920s. But it wasn’t until the 1980s that mutual funds became widely popular with mainstream investors.
In recent years, ETFs have taken off as an alternative to mutual funds.
An exchange-traded fund (ETF) is a “basket” of stocks, bonds, or other financial instruments that gives convenient exposure to a diverse range of assets. ETFs are an incredibly versatile tool that can track anything from a particular index, sector, or region to an individual commodity, a specific investment strategy, currencies, interest rates, volatility, or even another fund.
You can do about anything with them — hold a diversified portfolio, hedge, focus on a particular sector, or even profit in a bear market.
The most significant practical difference between mutual funds and ETFs is that ETFs can be bought and sold like individual stocks — and mutual funds cannot. Mutual funds can only be exchanged after the market closes and their Net Asset Value (NAV) is calculated. Shares of ETFs can be traded throughout regular market hours, like shares of stock.

Both mutual funds and ETFs have expense fees that can range from low to high. Mutual funds can have front or backend loads or redemption fees in addition to management fees.
ETFs that trade like shares have commissions to buy and sell. But some ETFs are so popular that brokers offer commission-free trading in them.
So Many Choices
The sheer number and variety of ETFs can be a bit mind-boggling. Over the last 20 years, we’ve seen just a couple hundred ETF offerings grow to more than 8,000 worldwide, encompassing more than 10 trillion in assets.
A surprising number of ETFs have failed. They started with an interesting focus (well, “interesting” to somebody) but failed to attract enough interest to remain viable. For this very reason, I avoid narrow niche ETFs that trade with low volume.
I eliminate many ETFs on poor liquidity alone. I’m not interested if there’s not much volume in a product. I don’t want to suffer high slippage from wide bid/ask spreads. I want to get in and out quickly and at fair prices.
To leverage or not to leverage?
Inverse and leveraged ETFs often use derivatives like options, futures, and short-term contracts to achieve 2x or 3x the daily change in the assets they’re intended to track.
These types of instruments have inherent time decay, and they tend to lose value over time, regardless of what happens in the index or benchmark that the ETF tracks. As a result, these products are best for very short holding periods or day trading.
Options on ETFs
Many ETFs have options (puts and calls) available. But even if the ETF itself trades with decent volume, that does not mean that the options meet my criteria for liquidity.
Sometimes I will use long options – puts or calls — if a clear directional move is in play. I also use many of my option premium selling strategies on popular ETFs. Just like with stocks, options can be used with ETFs for additional leverage, collecting premiums for income, and risk management.
An ETF Playlist
Here are some of my favorite ETFs and how I use them.
SPY, QQQ, IWM – Major index ETFs with huge participation. I use options strategies with these to collect premiums or profit from longer-term directional moves.
XLE, XLF, XHB, IYT, XLU, SMH – Sector Exposure. These can work well for directional trades in specific sectors. I like these sector plays as they can give a lot of protection against individual stock risk.
DBC, USO, UNG, WEAT, GLD, SLV, COPX, GDX, URA – Commodity Exposure. All of these can work well when the underlying commodities are appreciating. I tend to use these with option premium selling strategies such as covered calls and diagonal spreads.
TQQQ – Triple leveraged to the QQQ. This very popular ETF can work well to capture very short-term bullish moves in the Nasdaq 100 stocks.
SQQQ – This is the companion inverse ETF to TQQQ. It is triple-leveraged and inverse to QQQ. Long calls on SQQQ can work well to capture gains from a very short-term down move. Timing is everything in short-term trading, so I get in and out quickly, with trades lasting no more than a few days.

UUP – US Dollar Index. This can be a real winner when stocks are weak and the dollar is strong. Implied volatility on options is relatively low, so buying call options can work well if you catch a directional move. Using calls can give about 10x leverage; for example, a 3% increase in UUP might yield around a 33% gain for an in-the-money call option.
Technical Analysis
Whether an individual stock or an ETF, my answer for when to buy or sell is always based on price action. We only want to hold assets that are increasing or at least keeping their value while avoiding assets that are in decline.
And the toolset to evaluate price action is technical analysis. The same technical analysis we use for stocks works just as well for the more popular ETFs.
Learn more by visiting The Technical Traders!
Chris VermeulenTechnical Traders Ltd.
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation for their opinion.

The largest cryptocurrency, Bitcoin, topped the $20,000 barrier on Friday on optimistic market sentiments about a possible drop in inflation numbers. The second largest crypto, Ether, also rose on Friday.
However, additional interest rate hikes will likely constrict the economy, which is expected to create pressure on the relatively riskier crypto market. Experts believe cryptocurrencies will continue a downtrend amid the volatile economic backdrop.
Moreover, digital currencies might face heightened regulations in the future. Gary Gensler, the current SEC chair, stated that the Commodity Futures Trading Commission (CFTC) needs greater authority to oversee and regulate crypto non-security tokens and related intermediaries.
Moreover, with the much-anticipated Ether merge expected to occur soon, the crypto market might experience more volatility. Hence, the blockchain stocks Block, Inc. (SQ), Coinbase Global, Inc. (COIN), and Riot Blockchain, Inc. (RIOT) might be best avoided now.

Block, Inc. (SQ)
SQ engages in the creation of tools that enable sellers to accept card payments and provides reporting and analytics and next-day settlement. The company also provides hardware products.
On July 13, SQ subsidiary Afterpay and beauty retailer Sephora announced their partnership to enable customers to pay for U.S. beauty brands and products in four installments. However, the gains from this partnership might be stretched over a long period of time.
For the fiscal second quarter that ended June 30, SQ’s total net revenue decreased 5.9% year-over-year to $4.40 billion. Adjusted net income decreased 56.8% from the prior-year quarter to $110.74 million. Adjusted net income per share declined 63.3% from the same period the prior year to $0.18.
The consensus revenue estimate of $17.60 billion for the fiscal year 2022 indicates a 0.3% year-over-year decrease.
The stock has declined 70% over the past year and 54% year-to-date to close its last trading stock at $74.29.
SQ’s POWR Ratings reflect this bleak outlook. The stock has an overall D rating, equating to a Sell in this proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
SQ has a Stability and Quality grade of D. In the 107-stock Financial Services (Enterprise) industry, SQ is ranked #91. The industry is rated F. Click here to learn more about POWR Ratings.
Coinbase Global, Inc. (COIN)
COIN offers financial infrastructure and technology for the global crypto economy. The company’s offerings include the primary financial account for retailers in the crypto space.
On September 8, Enthusiast Gaming Holdings Inc. (EGLX) announced its collaboration with COIN to introduce the company as its preferred infrastructure provider to power its Web3-enabled games portfolio. However, there might still be some time remaining before substantial gains can be realized from this venture.
COIN’s total revenue decreased 63.7% year-over-year to $808.33 million in the fiscal second quarter that ended June 30. Net income and net income per share attributable to common stockholders declined 168.1% and 177.6% from the prior-year period to a negative $1.09 billion and a negative $4.98.
Street EPS estimate for the fiscal quarter ending December 2022 of a negative $2.06 indicates a 162% year-over-year decrease. Likewise, Street revenue estimate for the same quarter of $752.68 million reflects a decline of 69.9% from the prior-year period.
Over the past year, the stock has declined 67.4% to close its last trading session at $80.87. It has declined 68% year-to-date.
It’s no surprise that COIN has an overall F rating, which translates to Strong Sell in the POWR Ratings system.
COIN has an F grade for Growth, Value, Stability, and Sentiment and a D for Quality. It is ranked #153 out of the 154 stocks in the Software – Application industry. The industry is rated F. Click here to learn more about POWR Ratings.
Riot Blockchain, Inc. (RIOT)
RIOT, with its subsidiaries, is engaged in cryptocurrency mining operations in North America. The company primarily focuses on Bitcoin mining with a large fleet of publicly-traded miners.
For the fiscal second quarter that ended June 30, RIOT’s total revenues increased 112.4% year-over-year to $72.95 million. However, its net income and net income per share came in at a negative $366.33 million and a negative $2.81, down 1,994.5% and 1,377.3% from the same period the prior year.
The consensus EPS estimate for the fiscal year 2022 of a negative $2.47 indicates a 2,987.5% year-over-year decrease.

The stock has declined 72.1% over the past year and 63% year-to-date to close its last trading session at $8.26.
RIOT’s bleak prospects are reflected in its POWR Ratings. The stock has an overall F rating, equating to a Strong Sell in this proprietary rating system.
RIOT has an F grade for Stability, Sentiment, and Quality and a D for Value. In the 81-stock Technology – Services industry, it is ranked #79. The industry is rated D. Click here to learn more about POWR Ratings.

About the Author
Anushka Dutta is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. With a master’s degree in economics, she aims to help investors identify untapped investment opportunities by looking at the fundamental factors. Anushka is a regular contributor for StockNews.com.