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September 01, 2020 1:29pm
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One of the Top Food Stocks to Own: Delivering Outstanding Growth

Delivery person handing pizza boxes to customer

Shares of Domino's Pizza, Inc. (NYSE: DPZ) have been on a tear since May of last year. The fast food giant has watched its stock gain as much as 85% in less than a year as it returns to its winning ways. For context, in the ten years before Domino's last hit an all-time high, the stock gained 1,600%. Sure, it had a slump like everyone else in 2022, but this stock knows how to rally. 

Much of this is due to solid fundamental performance. The company's most recent earnings update, at the end of April, smashed analyst expectations with red-hot earnings and comparable sales growth. Indeed, investors could be forgiven for thinking they have missed much of the rally. 

Domino's Is in the Spotlight: Recent Stock Decline and Sector Trends

However, the past month has seen Domino's stock cool somewhat, with a 5% drop in Tuesday's session alone, making it a full 10% loss since the middle of June. Despite performing well itself, it looks like Domino's is getting caught up in a shift in investor sentiment towards the restaurant and fast food sector in general. 

Some comments yesterday from Baird and KeyBanc Capital pointed to general anxiety about the sector's strength and ability to meet and beat analyst expectations for this quarter.

Baird's data showed comparable casual dining sales for the most recent week, falling to -6%, well below the -3% in Q2 overall. Baird analyst David Tarantino suggested watching the "recent downward momentum" closely in case new headwinds emerge in the form of falling consumer confidence and related spending. Similarly, KeyBanc's Eric Gonzalez pointed to weakening investor sentiment on the space and warned that the upcoming earnings season could be "underwhelming." 

Domino's Outperform Rating: Analyst Insights and Expectations

However, while the list of stocks he feels are most likely to disappoint did include a pizza name, it was Papa John's International Inc (NASDAQ: PZZA), not Domino's. In fact, in a sign of just how much potential Domino's has, this week caught a red-hot upgrade from the same Baird that's turning bearish on the sector as a whole. They upped their rating on Domino's from Neutral to Outperform, with analyst David Tarantino being particularly bullish on the company's confidence level in its outlook. 

He summarized this in a note to clients on the same day the industry-wide numbers pointed to a slowing in growth: " With visible sales drivers, a positive unit development outlook, and a highly franchised business model, Domino's has a profile that fits well with the type of businesses that, we think, are attractive to own amid ongoing uncertainties about the health of consumer spending."

Investing in Domino's: Attractive Entry Point and Future Potential

For those of us looking to gain some exposure to the restaurant and fast food space, it doesn't get much better than this. Not only is Domino's being named as a standout performer set to buck the trend and outperform its peers, but this week's dip is also creating a solid entry opportunity. The stock is back trading under $500, closing just below $478 on Tuesday evening. Baird has a fresh price target of $580 on the stock, which points to a very appealing upside of some 20% from current levels. 

They're far from alone in their bullishness, either. The Royal Bank of Canada, TD Cowen, Wedbush, and Goldman Sachs all reiterated their Buy ratings on the stock last month. Goldman, in particular, went even higher than Baird with their price target and had theirs at a street-high $612. 

That's nearly 30% of the indicative upside from where Domino's closed last night, and it would mean the stock is back trading at its first all-time high since 2021. With Domino's history of setting high after high as it rallies, this is one to watch closely and get excited about.

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