Analysis, Perspective, Trading Strategy
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
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
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
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.
JoeDuarteInTheMoneyOptions.com is independently
operated and solely funded by subscriber fees. This web site and
the content provided is meant for educational purposes only and
is not a solicitation to buy or sell any securities or investments.
All sources of information are believed to be accurate, or as otherwise
stated. Dr. Duarte and the publishers, partners, and staff of joeduarteinthemoneyoptions.com
have no financial interest in any of the sources used. For independent
investment advice consult your financial advisor. The analysis
and conclusions reached on JoeDuarteInTheMoneyOptions.com are the
sole property of Dr. Joe Duarte.