Can Habit Restaurants Keep Going After Last Week's 15% Pop?

By Markets Fool.com

Image source: Habit Restaurants.

Continue Reading Below

Burger chains are starting to show signs of life again. Shares of Habit Restaurants (NASDAQ: HABT)jumped 14.7% last week, moving higher despite a lack of bullish company-specific news. Habit Restaurants stock has now moved 18% higher since the company posted weaker-than-expected financial results earlier this month, an odd sight in a market that isn't historically very forgiving.

The growing chain of restaurants specializing in charbroiled hamburgers isn't the only "better burger" chain that's storming back into market fancy this month. Shake Shack (NYSE: SHAK) stock is up 19% in November. Red Robin Gourmet Burgers (NASDAQ: RRGB) -- different from Habit or Shake Shack in that it's a table-service eatery but still squarely in the "better burger" category -- is up 17% this month.

It's been a good month for the market. The S&P 500 is trading 4% higher in November, but that's no match for Habit, Shake Shack, and Red Robin, which are trading 18%, 19%, and 17% higher, respectively, month to date.

Hard Habit to break

Habit Restaurants investors can use the rally. The stock has been out of favor since shortly after its IPO. The chain went public two years ago at $18, peaking at $44.20 just a few days later. It's been mostly downhill ever since. Habit stock is trading 62% below its all-time peak, even after last week's rally.

Continue Reading Below

The irony in the recent strength in the stock is that Habit's coming off of a dreadful quarter. Comps rose 4%, a healthy uptick in this climate and keeping the chain's streak of positive same-store sales alive at an impressive 50 quarters. However, it fell short of Wall Street's targets on both ends of the income statement. It also slightly lowered its revenue guidance for the entire year.

The chain of 160 mostly company-owned locations is still doing a few things right. It followed Shake Shack's lead in introducing a fried-chicken sandwich last month, and it said initial customer response was overwhelmingly positive. Steady comps over the past decade find average unit volumes clocking in at $1.9 million a year, less than Shake Shack or Mickey D's, but at the high end of most of its other burger-flipping peers, including Burger King and Five Guys.

The one thing that's been holding Habit Restaurants and Shake Shack back has been valuation. Unlike Red Robin Gourmet Burgers at a reasonable 17 times next year's projected profit, we have Habit and Shake Shack at multiples north of 50 and 70, respectively. The lofty markups may be why investors have stayed away from Habit Restaurants and Shake Shack since the "better burger" frenzy peaked with investors nearly two years ago, but the chains keep finding ways to make their eateries more magnetic to hungry patrons. The strategy's been paying off for investors in November, and both chains are still early in their expansion cycles.

10 stocks we like better than Habit Restaurants
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Habit Restaurants wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 7, 2016

Rick Munarriz owns shares of Habit Restaurants and Shake Shack. The Motley Fool is short Shake Shack. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.