When Bad News Sends Shares Higher – Take Notice

McDonald’s MCD reported disappointing results across pretty much its entire second-quarter results. You would have thought that the stock would tank on that news.

Instead, its shares picked up nicely by mid-morning as shown below.

By 1:41 PM MCD had risen further, to $263.23, up $11.23 per share or +4.46%.

Absorbing unequivocally bad news and climbing anyway typically indicates significant buying interest which often has legs.

MCD is not statistically cheap. It trades for about 24x this year’s EPS estimate while yielding about 2.54%. Those compared with a 10-year median multiple of 23x along with about 2.64% in current yield.

I am not a buyer or holder of MCD.

The fact that is responded so positively to poor results, though, speaks loudly about how undervalued many other fast-food purveyors are currently.

Cracker Barrel CBRL had dropped from an all-time peak of $175.10 to a recent low of just $38.49. That represented a stunning 78% decline.

Jack in the Box JACK parroted that type of move. A peak of $124.50 in 2021 gave way to a July 10, 2024 low of $46.10. From top to nadir was an approximately 63% decline.

CBRL has had poor recent results and might need a bit of time to turn things around. Even so, it was so cheap that it bounced to as high as $47.12 intraday on Jul. 17, 2024, up 22.4% in a matter of days.

Every stock has an ultimate bottom barring truly distressed fundamentals.

JACK hit bottom on July 10 before rising to almost $59 on July 25. That very quick turnaround was a solid 27.8% over just 11 trading days.

Unlike McDonald’s, though, JACK is now in what should be its second-best earnings year ever. FY 2024 (ends Sep. 29, 2024) is expected to come in with EPS of $6.30 or better. Calendar year 2024 is now primed for at least about $6.50 in EPS.

Jack in the Box has a long history of sharp plunges followed by even more extreme percentage recoveries.

Since October 2019 there were five major selloffs averaging (-48.1%) over typical holding periods of 6.4 months.

The most recent four rebounds averaged +195.7% gains, plus dividends, from the previous bottoms to their subsequent peaks. The four bounce backs average 6.5-months in duration.

There is every reason to believe that the already-in-place rebound should continue to much higher levels.

JACK’s Del Taco division is expanding rapidly and was just named the top quick service restaurant in America. It dethroned privately held Chick-fil-A which had held the #1 position for nine straight years.

Three Del Taco’s opened in Florida and Virgina over the past week and a half. All three units posted higher than ever seen sales on the first day, plus full-week sales in those new markets. A franchisee has already come forward with a plan to open seven more Del Tacos in those areas.

JACK operated in just 22 states until recently. Management says it plans to be present in 40 states by 2030.

There is plenty of room for expansion of both the burger and Mexican chains going forward. Revenue growth will expand rapidly along with EPS growth due to the expanding franchise royalty income.

At its current quote of $57.75 JACK is now offered at only 8.9x estimated calendar year 2024 EPS while yielding a far above typical 3.05%.

Over the most recent decade JACK had an average P/E of 19.5x along with a normalized yield of 1.61%.

The graphic below was generated in early April 2024 when JACK fetched $61.25 per share on its way down. Yahoo Finance carries the same $6.30 per share estimate for JACK’s FY 2024. Its FY 2025 projected EPS sit a dime higher than what Value Line indicated on the almost three-month old reported shown next.

A new full page Value Line report will be generated on Aug. 10.

Fiscal Q3 numbers (ended Jun. 30, 2024) will be released on Tuesday Aug. 5 after the close. Analysts see mild improvement from the same period in 2023. EPS were especially weak in Q4 of 2023 (ended Oct. 31, 2023) making for what should be an exciting year-over-year improvement when end of FY 2024 results get reported this fall.

Another plus factor for JACK? About 50% of all shares outstanding were retired since the end of FY 2014. Further buybacks are already authorized and will have multiplied effects due to JACK’s significantly lower recent price points.

What Is JACK Worth?

A still-below-normal 17x multiple of CY 2024 EPS could easily send JACK up to north of $110 by winter time. That same P/E on next year’s earnings might elevate JACK to a new all-time peak.

Research house Morningstar labels JACK as a 5-star (top) buy. Its present-day (rather than year-ahead) fair value estimate sits at $88.22, about 53% above the current quote.

That goal is far from an upper limit. JACK hit $99.56 on Jul. 31, 2023. It peaked above $124 on slightly higher earnings during 2021.

GuruFocus research sees JACK’s present day fair value as $97.09. That implies over 68% upside plus dividends just for reaching that level.

Note, too, that JACK often traded for between 20x and 33x earnings during the five years stretching from 2014 through 2018. Renewed growth over the coming years could generate those kind of multiples once again, making all the listed target prices appear laughably low.

Twenty-times calendar year 2025 EPS could see JACK elevate to $140-$150.

JACK has become my single largest dollar holding ever as I lustily averaged down as the shares dropped lower and lower.

Options are now available as far as Oct. 17, 2025. Shorting puts at near-the-money levels offers the chance to lock in worst-case, forced purchase prices at, or near, the post covid-panic lows set after April of 2020.

If MCD is a buy at 24x earnings what does that say for benefit of owning JACK near its best non-Covid panic level since the depths of the 2008-09 meltdown?

Back then, JACK rose from under $12 to over $113 by 2016.

It is time to get back on board for the largest part of the rebound which has already begun.

More Paul Price:

At the time of publication, Price had no positions in MCD, and was long shares and short puts on both CBRL and JACK.