Fast food titan Wendy’s (WEN) recently made waves when it announced its foray into the Metaverse, complete with Baconator basketball. However, Wendy’s stock left a sour taste in investors’ mouths today. The stock is currently down 2.1%.
While there are concerns about Wendy’s ability to handle a recession—which seems increasingly likely to hit—I’m much less concerned and remain bullish despite some recent decline in sentiment.
Wendy’s last 12 months in trading have been mostly a study in finding a company’s level. While much of April and May were spent around the $22 mark, a brief spike in June sent the company up over $28 per share. That spike didn’t last; soon, the company dropped back to around $20 per share, where it remains to this day.
The latest news hit investors fairly hard. BMO Capital Markets issued a downgrade on Wendy’s stock. Analyst Andrew Strelzik dropped the company from “outperform” to “market perform.” Wendy’s price target was also lowered from $28 to $22 per share.
The biggest problem? Strelzik et al. weren’t so sure that Wendy’s was in a good position to handle a decline in consumer spending. Others in the fast-casual space, however, were better suited. This meant a risk to Wendy’s market share overall and its bottom line.
Wall Street’s Take
Turning to Wall Street, Wendy’s has a Moderate Buy consensus rating. That’s based on six Buys, seven Holds, and one Sell assigned in the past three months. The average Wendy’s price target of $25.81 implies 26.6% upside potential.
Analyst price targets range from a low of $22 per share to a high of $29 per share.
Support on Several Fronts for Wendy’s
Support for Wendy’s right now is a bit of a mixed bag. However, more sources seem to lean toward bullishness than bearishness.
Hedge fund involvement is increasingly bearish. Based on the word from the TipRanks 13-F Tracker, hedge fund involvement has been in a slow state of decline since last March. A very slow state, actually; March 2021 featured hedge funds owning a little over 26.7 million shares. December 2021, meanwhile, brought that number down to just under 25.372 million shares.
Insider trading at Wendy’s, meanwhile, has been weighted heavily toward buying. Just in the last two months, buyers led sellers 14 to 8. There were no sellers at all in March, and five buyers. February featured eight sellers, but nine buyers. Before the sales in February, you had to go all the way back to August to find an insider selling shares.
Meanwhile, retail investors are improving their Wendy’s positions, with total portfolios holding Wendy’s stock up 8.2% in the last 30 days and 1% in the last week.
Wendy’s dividend history, meanwhile, is a bit rocky but still represents a decent prospect for the income investor. Dividends performed just how an income investor would hope in 2019. Starting in May 2020, however, dividends plunged. Dividends recovered to “normal” levels in August 2021, and hikes followed thereafter.
Wendy’s can Take a Recession
BMO is right to be concerned about the impact of a recession on any stock. Frankly, we’re due for a recession, like it or not. The way things are going with the supply chain, it’s kind of a wonder we’re not already in a recession.
The idea that Wendy’s can’t weather a recession as well as, say, McDonald’s (MCD) can make some sense. After all, McDonald’s has made a lot of headway on its Dollar Menu over the years.
Wendy’s has come back with its “Four for $4” special and the $5 Wendy’s Biggie Bag, but that’s not the same as a Dollar Menu. Being able to get cheap food is important in a recession, especially when prices at grocery stores are exploding as well.
Worse, McDonald’s is cutting into Wendy’s on innovation as well. McDonald’s recently rolled out the Spicy Chicken McNugget, a clear counter to Wendy’s Spicy Nuggs. Whether or not McDonald’s will keep the Spicy Chicken McNugget around is unclear.
McDonald’s has made a lot of impact before with the limited-time offer; just ask the McRib fans out there. However, this does damage Wendy’s ability to compete by taking away a unique product.
It’s one of the problems with competing on the strength of a product. Unless you get a product that can’t be readily replicated, you run the risk of competitors coming up with their own version. A spicy chicken nugget, in general, isn’t exactly difficult to make.
A Google search returned 1,160 results for “recipe for spicy chicken nuggets” in just over half a second. From there, simple modifications should prevent trademark or copyright issues. Suddenly, a chunk of market share is at risk.
However, Wendy’s ability to compete in a recession isn’t likely that much at risk. Prices are going up universally thanks to labor issues and supply chain problems. Thus, even if Wendy’s wouldn’t be able to compete so well in a recession, everyone else would be largely in the same boat.
Concluding Views
Granted, the fast-food environment is about to get a lot more competitive as customers watch their cash more closely for going to the grocery store outright. Nonetheless, Wendy’s, with its comparatively innovative menu and long-term name recognition, isn’t likely to fail outright. It may slip a bit, yes, but not that much.
Throw in a receptive environment for buyers—both insider and retail—and a stock trading below its lowest price targets, and Wendy’s looks fairly attractive.
Recession or not, this is still likely to be a go-to spot for cheap dinner. That should keep customers coming back. That’s why I remain bullish on Wendy’s. It’s already survived several recessions. It should be able to handle the next one too.
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