The restaurant sector performed fairly well based on the 34.2% gain in the value of the PowerShares Dynamic Food & Beverage(ETF) (NYSEMKT:PBJ). However, what’s even more interesting is that the industry itself is expected to grow earnings by 7.8% year-over-year. So there seems to be a fairly large disconnect between the performance of these stocks and the year-over-year growth that has been estimated for restaurants as a whole.
Source: Goldman Sachs
In 2013, investors have opted to invest into riskier asset classes like fixed income and equities. The real kicker is that equities have been able to attract $74 billion in fresh capital. This has been able to push the valuation of stocks even higher.
The overriding theory is that there’s a large asset rotation taking place. Higher bond yields means falling bond coupon values, and most people in the financial sector get paid on performance. So the underlying theory is that asset managers are shifting portfolios to have a greater composition of stock rather than fixed income/money market.
Sector strategy
It couldn’t be a bad idea to own the Powershares Dynamic Food & Beverage ETF as it offers diversification and a 1.4% distribution yield (dividend). The fund’s gross expense ratio is pretty high at around 0.6%, but that is because the fund’s market capitalization is $318.3 million, which is small for an exchange traded fund. If the fund had a larger market capitalization, the fund’s base fee would most likely be lower.
On the bright side, the distribution yield offsets the management fee and the fund offers diversification that generates higher yields than the stalwarts of the industry. The exposure to smaller regional players like Denny’s and Sonic is the source of capital appreciation. The smaller restaurant franchises have more upside as they have not reached full market saturation domestically.
Conclusion
McDonald’s Corporation (NYSE:MCD) and Yum! Brands, Inc. (NYSE:YUM) both missed earnings expectations this past quarter. This has sent mixed signals to analysts and may force downgrades from different analysts. McDonald’s Corporation (NYSE:MCD) strategy of generating better results through creative tax practices could only take the company so far.
The industry should be able to garner added capital appreciation. The lion’s share of it will come from regional restaurant chains. Even though earnings growth rates are declining for the industry stalwarts, the stock performance of these giants should continue to improve based on equity inflows.
The article McDonald’s and Yum! Brands Had Bad Results But Good Returns originally appeared on Fool.com and is written by Alexander Cho.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends McDonald’s. The Motley Fool owns shares of McDonald’s. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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