The Trades:

Buy to open the February 15, 2019 put on McDonalds  (NYSE: MCD) with a strike price of $180 at $3.35 or lower. Symbol (MCD190215P180)

Buy to open the February 15, 2019 put on Wendy’s Company (NYSE: WEN) with a strike price of $16.00 at $.37 or lower. Symbol (WEN190215P16)

*Options are always risky but especially risky at this juncture in the market. Be patient filling these trades. At this writing, the futures are up slightly but wild swings are common. You might consider filling half your position today and a half in the following week.

Rationale:

We had a successful bearish trade in the burger stocks recently. Presentations by many fast-food companies at the ICR Investment conference confirm that labor is pinching margins and demand is driven primarily by price promotions.

Burger players are fighting each other for a shrinking piece of a stagnant pie. Despite a small increase in comp sales for the month of December, customer traffic fell almost 1% and is down 1.8% for the quarter.

These burger operators trade at valuation multiples higher than earnings growth. McDonald’s reports on January 30 and Wendy’s Company on February 20th.

Promotions to lure in foot traffic are becoming increasingly aggressive:

1. Restaurant Brands International, the parent company of the Burger King, Popeye’s Louisiana Kitchen, and Tim Hortons initiated a one cent Whopper deal. The trick is that the customer needs to be within 600 feet of a McDonald’s restaurant. A clear kick in the gut for stealing traffic.
2. Many McDonald’s regional stores have retaliated by continuing their $1 “any-size” drink promotion which began last summer. Wendy’s is caught in the crossfire between its two larger competitors.
3. Healthier fast-casual chains like SweetGreen, Chipotle and Boloco continue to lure customers away with healthier albeit, more expensive options.