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Amidst Investor Paralysis - A Small Cap Steak House Chain worth Gobbling Up

By Joe Duarte on July 16, 2017

As difficult as it may seem to accomplish in the midst of daily two hundred plus or more Dow Industrial point moves in any direction, a slow and steady grinding it out approach will win this investing race. Last week I described the current market as a bear market in spirit. And I’m sticking with that notion, especially after the recent geopolitical events and the potential for very dire events which may or may not follow.

But if you stick with the charts instead of the day to day event driven volatility and barring a sudden and significant decline to new lows, it seems plausible to now consider that we may have seen the bottom in this market for the next few weeks and perhaps months. Still, I’m not giving the market an all clear as even the notion that a true price bottom is now in place remains uncertain and the future remains murky at best. As a result, the best any investor could hope for at the moment is portfolio stability – the return of your money not the return on your money - which may be achieved in multiple ways ranging from hedging to considering the possibility of going to an all cash position.

Perhaps the best solution is what I’ve been advocating over the last few months, high levels of cash, short term trading, and relying on small positions in select individual stocks, ETFs and increasing the use of options. In that vein, it’s important to know what’s working in this market - and the answer is variable to say the least. Therefore, in this report, along with a broad market overview, I will touch on one stock which has been resilient and may prove useful as a model for further study.

Market’s Breadth Suggests Investor Paralysis

Investors are in a state of total paralysis. Just when it seems a trend will assert itself, it turns out to be yet another false start. That’s why the New York Stock Exchange Advance Decline line (NYAD), the most accurate indicator since the presidential election, seems to be stuck in the mud. In fact, it’s that lack of sustained direction in NYAD, which suggests that for now, we may not go too far, up or down, at least on a closing basis, despite the overall noise and intraday gyrations of the market.

Here is the big picture. The market is suddenly trendless as investors don’t know what to do given the intraday volatility and the rising geopolitical uncertainty. Note the completely neutral finish on NYAD for Friday, April 13. Specifically look at the ROC and RSI sideways close, a sign of total investor indecision.

Volume Suggests Hands in Pockets Mode for Traders

There is an old Wall Street adage which notes that low volume trading means that traders are keeping their hands in their pockets. This is increasingly evident in the present market as trading volume continues to sink – note the slow and steady collapse of activity in the S & P 500 (SPX) during the month of April.

Furthermore, the decline in trading volume is evident in the Nasdaq 100 Index (NDX). Finally, note the complete lack of conviction displayed by the Accumulation Distribution (ADI), On Balance Volume (OBV) and ROC indicators. In a nutshell, few are trading, few have any conviction, and momentum is flat.

What’s working in this Market?

Earlier this year I recommended Ruth Hospitality Group (NSDQ: RUTH), an owner operator of the Ruth’s Chris upscale steak houses featuring New Orleans style beef and seafood along with premium liquors and desserts. I own this stock, and I had Easter brunch there this year which gave me an opportunity to see the operation up close and personal.

I saw large groups and big tables full of people with lots of wine bottles on most of them along with very steady business. This is especially interesting since I went near the early afternoon lull time. I figured, even during that time of day, based on the menu’s listed prices that the average customer tab was somewhere around $65-$80 depending on the wine and liquor tab. That’s a rate of about $24,000 in sales per hour.

More important, I didn’t see any unhappy people working there or sitting at the tables and I didn’t notice anyone looking to budget. Sure, this is all back of the napkin accounting and analysis. And it was a holiday weekend. But what I saw goes along with what would seem to be a reasonable customer response to management’s slow and steady approach of growing the business while providing high quality food and service at a price that the market will bear while yielding profits.

Buying Restaurants Not Stock

A perfect example of management’s sound strategy includes buying back Ruth’s franchises in high traffic high margin areas such as Maui, slowly remodeling and upgrading stores, expanding the menu offerings and expanding internationally. This is a huge contrast to other companies who are spending their money buying back their stock. Indeed, this attention to the business as opposed to the stock price and management bonuses as is the norm these days, has led to a steady improvement in financial results and a strengthening of the brand. As a result, the stock is up 45 percent since October 2017 and remains in an enviable up trend with the next short term upside target around $27.

All things considered, RUTH is an excellent poster child for what’s working in this market, a small cap niche company with excellent management, stable cash flow, and a knack for running the business. The trading volume for the stock is low, but so is the market’s. Meanwhile On Balance Volume (OBV) is very positive while the Accumulation Distribution (ADI) seems to have bottomed out. This last indicator, in my opinion, may be a sign that I and others who own the stock may have been early to the party. This is further supported by the ROC indicator, which measures momentum and is rising steadily.

RUTH is scheduled to release earnings on May 3 and the steady rise in the stock’s price suggests investors are expecting good news. Of course in the current environment a lot can happen to the stock and the market until the report is released. Still, at this point, the moral of the story may be that owning the business and not necessarily the stock may have some value.

Disclosure: I own shares in RUTH and I still love their shoestring fries along with their bread pudding.

Joe Duarte is author of Trading Options for Dummies, now in its third edition. He writes about options and stocks at www.joeduarteinthemoneyoptions.com.



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