Magnifi Communities

It’s been a volatile year for the restaurant industry group (EATZ), which found itself down over 29% for the year before its recent recovery. This rebound can be attributed to hopes that inflation has peaked combined with short covering, with the small-cap and mid-cap restaurant names having elevated short interest relative to other industry groups.
Following this rally, some investors might be looking for names that haven’t participated in the recovery. However, underperformance is often related to underlying problems with a business, so it’s essential to look at industry trends, sales performance, and other key metrics to ensure one isn’t buying into a value trap.
In this update, we’ll look at two restaurant brands with above-average short interest and see which is the better stock to own – Restaurant Brands International (QSR) or Red Robin Gourmet (RRGB).
Scale, Business Model & Unit Growth
From a scale standpoint, Restaurant Brands International (“RBI”) and Red Robin differ materially. RBI has more than 29,000 restaurants under four different brands (Burger King, Tim Hortons, Firehouse Subs, Popeyes Chicken), and Red Robin has 525 restaurants under one brand: Red Robin Gourmet Burgers.
Typically, the smaller-scale company would be the more attractive one assuming it was a high-growth concept and a similar business model. However, Red Robin is inferior in both categories.

Not only has Red Robin seen its store count decline by 10% over the past three years while RBI’s store count has increased 15%, but Red Robin operates a casual dining concept, and its brand is nowhere near as iconic as RBI’s top-rated brands in the coffee, burger, and chicken category, which are Tim Hortons, Burger King, and Popeyes, respectively.
Meanwhile, only 20% of Red Robin’s system is franchised vs. 100% for RBI, meaning that Red Robin is much more sensitive to inflationary pressures, seeing a sharp decline in earnings when it’s seeing food and labor costs rise.
So, while Red Robin does win from a scale standpoint, benefiting from considerably more whitespace, this doesn’t help if it isn’t growing. In addition, RBI benefits from much higher margins (43% gross margins vs. 16%) and a 5% unit growth rate vs. a declining store count for Red Robin, with no reversal of this trend in sight.
Restaurant Brands – 1 / Red Robin – 0
Positioning In A Recessionary Environment
From a positioning standpoint in a recessionary environment, there are also major differences that must be considered.
While RBI benefits from three quick-service restaurants with average tickets below $7.00 (Popeyes, Burger King, Tim Hortons), and one fast-casual concept (Firehouse Subs), Red Robin has casual dining restaurants.
The latter segment of the restaurant industry tends to massively underperform in recessionary environments, given that consumers are looking to trade down. However, if they are looking for a meal, takeout is the much cheaper option, saving money on alcohol (home vs. restaurant) and the tip. This is not ideal for casual dining names which rely on drinks/appetizers/desserts to boost margins.
Meanwhile, RBI is a go-to name in a recessionary period, with many consumers looking to trade down if they want convenience. Given the similarly priced menu to brands like McDonald’s (MCD), it’s no surprise that while casual dining traffic was down over 6% in June, quick-service restaurants like RBI’s brands were flat year-over-year.
This is related to the sharp rise in energy costs, fuel costs, mortgage rates, and grocery prices, all contributing to shrinking discretionary budgets. So, if we do head into a prolonged recession, RBI’s margins and the fact that quick-service/pizza will allow it to outperform in weaker economic environments give it the edge by a wide margin.
Firehouse Subs is a fast-casual and higher-ticket brand ($10.00+ price per check), but this makes up just ~1,200 of RBI’s ~30,000 restaurants, so I do not see this as an issue. Red Robin benefits from Donatos Pizza being rolled out across its system, but the sales contribution is too small (less than 5% of sales) to make a meaningful difference.
Restaurant Brands – 2 / Red Robin – 0
Valuation
Finally, if we look at both names from a valuation standpoint, RRGB trades at ~8x EV/EBITDA while RBI trades at 13x EV/EBITDA, suggesting that RRGB is much more attractive from a valuation standpoint.
However, one wouldn’t expect to buy a Ferrari for the price of a Ford, and this is a case of RRGB being cheap for a reason. Not only does the company return no capital to shareholders (QSR pays a 4.0% dividend and buys back 2% of stock per year), but it has weaker margins, a declining store footprint, and is in a less attractive segment of the restaurant industry (casual dining vs. quick-service).
So, while the stock is far cheaper strictly on an EV/EBITDA basis, RBI is much cheaper on a PEG basis, trading at a PEG ratio of ~1.6, while RRGB trades at a PEG ratio of ~2.2.

Meanwhile, RBI investors are getting a guaranteed return of 4% per year from dividends alone to help weather general market volatility, boost total returns, and see continued earnings per share growth through opportunistic buybacks.
Restaurant Brands – 3 / Red Robin – 0
Final Verdict
To summarize, I see RBI winning in the valuation category as well, with RRGB being a case of a low-quality name trading at a fair price. Conversely, RBI is a high-quality name trading at an attractive price for investors with a long-term outlook. T
herefore, I see RRGB as an Avoid losing 0-3 to RBI, and I would view any pullbacks in Restaurant Brands International (QSR) below $57.00 as buying opportunities.
Disclosure: I am long QSR
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.

To hear Jeremy Siegel tell it, the Federal Reserve has already won its fight over inflation and should start taking its foot off the monetary brakes.
“I think the Fed should be near the end of its tightening cycle,” the ubiquitous market prognosticator and Wharton School finance professor told CNBC last week. According to Siegel, current headline inflation may still be high, “but forward-looking inflation has really been stopped. And I think the Fed should really slow down the rate of hiking, and if we get a snapback in productivity that’ll put further downward pressure” on inflation.
Is he right, or is it just wishful thinking so stocks can resume their decade-long winning streak?
Right now the signals look mixed, based on the two most important and widely-followed economic reports issued last week.According to the Commerce Department, second quarter GDP fell 0.9% at an annual rate, on top of the prior quarter’s 1.6% decline.

Until this year, the mainstream media would have immediately pounced on that as clear evidence that we are officially in a recession, following the traditional definition of a downturn as two back-to-back negative quarters. Now, however, with a feckless president poised to lead his party to an election Armageddon in November, we learn that the old standard simply doesn’t apply anymore, so we can’t use the dreaded “R” word.
Whether that’s pure bias or pure something else that also begins with a B, July’s robust jobs report, which showed the economy added a much higher than expected 528,000 jobs, does create some doubt whether we are in a recession or not, and if so, what the Fed plans to do about it.
Instead of viewing the jobs report as good news being bad news – i.e., the Fed will need to continue tightening to stifle economic growth—and sell stocks, the market instead went up on Friday and continued to rally on Monday morning. Is the recession – if there ever was one – now officially over, the inflation monster slain and no further need for the Fed to continue to raise interest rates?
Not according to at least one Fed official. Noting that the Fed raised interest rates by a steeper-than-expected 75 basis points at both its June and July meetings, Fed governor Michelle Bowman told the Kansas Bankers Association over the weekend that “similarly-sized increases should be on the table until we see inflation declining in a consistent, meaningful and lasting way.”
“Our primary challenge is to get inflation under control,” she said.
The Fed doesn’t meet again until September 20-21, which means a lot of economic statistics are going to come in in the meantime. Depending on what those figures reveal, will the Fed revert to its “data dependent” monetary policy stance, or will it stick with its new “forward guidance” policy and keep raising rates regardless of what the numbers show?If stock market sentiment is any clue, Professor Siegel may be onto something.
Since mid-June, the S&P 500 is up more than 13% and the beaten down NASDAQ is up over 18%. Of course, that could simply be a short-term, bottom-fishing rally that almost always appears during bear markets, sometimes for extended periods (like this one).
Should we take that to mean that the Fed is willing to at least wait and see what happens with inflation before it raises interest rates again in September? Or has it already made up its mind what it wants to do?
It seems overly optimistic to believe that nearly 14 years of massive monetary and fiscal stimulus that inflated the price of goods, services and assets could be unwound after a couple of relatively modest Fed interest rate hikes, with almost no similar restraint on spending by Congress.

Can inflation really go away that quickly? Can you get instant relief from a ferocious hangover by popping a couple of Advils?
Of course, this is something that a lot of other investors would dearly love to believe, but it just seems too painless. But others would argue that we have in fact suffered a lot of financial pain, and that it’s time for the good times to start rolling again. After all, including its latest rally, the S&P 500 is down 13% from its all-time high last December, while NASDAQ is still off by more than 21%.
However, those losses seem too modest compared to previous bear market drops. For example, the S&P plunged more than 50% during the 2008 global financial crisis, a period preceded by reckless regulatory stimulus that ignited the housing crash.
Should we therefore expect more pain to come, or will the next month’s economic statistics show that we’re just fine—inflation is coming down, more and more people are getting hired, and economic growth is only being modestly impacted?It will be interesting to watch what happens between now and the next Fed meeting. But I would keep my guard up.
George YacikINO.com Contributor
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 (other than from INO.com) for their opinion.

Last week, the jobs report was released. Economists were expecting an additional 258,000 new jobs added last month. The Labor Department’s report revealed that the U.S. economy has had robust job growth last month adding over 500,000 jobs in July.
The exceedingly strong numbers of the report diminished concerns about the United States entering a recession. While this optimistic report bodes well for economic growth, it certainly does not address inflation.
However, it does change market sentiment which had been intensely focused on the last two GDP reports. On July 28 the government released the advance estimate of the second quarter GDP. The report revealed that the GDP had decreased at an annual rate of 0.9% during the second quarter of 2022.
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Earlier this year the BEA reported a decrease in the first quarter GDP of 1.6%. The widely accepted definition of a recession is an economic contraction over two consecutive quarters.

The fear of a disappointing jobs report that pressured yields on U.S. Treasuries and the dollar lower was reversed. The dollar gained 0.8% which is equal to Thursday’s decline. Gold gave up roughly half of the $30 gain Thursday declining by $14.50 on Friday. As of 6:25 PM EDT on Friday, gold futures basis the most active December contract was fixed at $1792.40.
Spot or physical gold lost $15.57 and was fixed at $1776.40 according to the Kitco Gold Index. On closer inspection, the KGX revealed that $13.60 of Friday’s decline of was a direct result of dollar strength, and a fractional decline of $1.20 was the result of traders bidding gold fractionally lower.
Gold futures closed above $1800 Thursday and the 50-day moving average was significant, however, very short-lived. It is also less likely that we will see gold recover quickly in that Friday’s jobs report strengthens the resolve of the Federal Reserve to raise rates by another 75 basis points in September.
This will also be highly supportive of the U.S. dollar as we saw in trading today.
According to Michael Hewson, chief market analyst at CMC markets, “Today’s labor market report is bad news for gold bulls, with next week’s CPI report the next key test,” the bearish sentiment reflected in the above quote was a common theme amongst other analysts.

Bart Melek, head of commodity strategies at TD Securities said, “Gold had recently rallied on the thought that the Fed will shift from hawkish to dovish. But the jobs data shows the U.S. economy is strong, and this can prompt the Fed to be more aggressive, which is not a good story for gold,” Melek added that the “next catalyst for gold prices will be the US CPI print coming out next week.”
The only wildcard is if there is an increase in geopolitical concerns regarding Russia’s war in Ukraine and/or China’s response to Nancy Pelosi’s visit to Taiwan.
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Wishing you, as always good trading,Gary S. WagnerThe Gold Forecast