Wingstop Stock at a Crossroads With Highly Aggressive Strategy

What’s the worst chicken wing you’ve ever had?

For me, it was at McDonalds (MCD) . McDonalds briefly delved into the world of chicken wings in 2013, with its Mighty Wings product.

By early 2014, Mighty Wings had been discontinued. Give McDonalds credit for taking quick action to cut its loss on a product that wasn’t enthusiastically received.

Wingstop (WING) , on the other hand, has had some success with its wings. The company made headlines earlier this week when it announced better-than-expected earnings, but the news wasn’t all positive.

Wingstop’s quarterly revenues came in light. Same store sales dropped by 5.6%, considerably worse than the expected decline of 2.5%. 

Wingstop Takes Flight

So, why have Wingstop shares gained 15% in less than a week?

Some analysts are pointing to Wingstop’s digital smart-kitchen system, which is expected to cut wait times in half. While a highly automated system will improve margins, it’s also likely to become the industry standard. In terms of competition, this could eventually blunt any perceived edge for Wingstop.

Others are referencing the Dallas, Texas-based company’s highly aggressive growth strategy. Wingstop currently has under 3,000 global locations, but has plans to more than triple that figure to 10,000.

In the just-ended quarter, Wingstop opened 114 locations, an average of more than one per day.

There are multiple advantages to a growth strategy. Think of all the times you've driven past a McDonalds. With those ubiquitous golden arches, each location is essentially an advertisement, as well as a sales outlet. 

The other advantage is economies of scale. As the total volume of product sold increases, the cost per unit decreases. 

How to Play Wingstop

There’s no guarantee that any of this will work. But if it does, investors will wish they’d established a position early in the process. How should investors approach Wingstop, assuming they should approach it at all?

What needs to happen in order for the stock to become a candidate to buy? There are two obstacles in Wingstop's path. 

First, Wingstop must close above its 50-day moving average (blue), currently located at $264 (point A). The price must also exceed $273 (red dotted line), the October 2 high (point B).

If Wingstop can vault those two obstacles, it has a chance to climb to $309 (point C) as an initial target (solid green line), and could run to $345 (point D, black solid line).

Wingstop’s chart may not be perfect, but it does show strong support in the $204 area (black dotted line). If Wingstop drops below that level, the stock becomes a sell.

At the time of publication, Ponsi had no positions in any securities mentioned.