'Nothing changed overnight' to make Wendy's a better bet, trader says as stock sees Reddit interest

Retail traders are taking a fresh look at Wendy's.

Shares of the fast-food chain surged about 26% to records on Tuesday after a post in Reddit's popular WallStreetBets forum pitched Wendy's as "the perfect stock" for the group on account of its signature products and "effective" social media presence.

It's the latest so-called meme stock that has captured the group's interest. The growing list includes GameStop, AMC and Bed Bath & Beyond.

Two market analysts cautioned investors about getting in on the hype.

"I think the reason the Reddit crowd is pushing it up today is because the retail share float is pretty small in Wendy's, but I can guarantee you nothing changed overnight to change the fundamental story," Gradient Investments President Michael Binger told CNBC's "Trading Nation" on Tuesday.

Though the company has a "decent business model" and can take advantage of the economic reopening, its stock is trading at a notably high price-earnings multiple for just 3% sales growth, he said.

The stock has even broken above its average analyst price target of $27.85, according to FactSet.

"We look for a disconnect between valuation and fundamentals," Binger said. "With price targets being achieved here trading at these levels, I just don't think it's a good entry point here. Unless you're the nimblest of traders, I would just stay away from Wendy's right here. I think it's reached a price target and it's relatively expensive versus other stocks in the group."

Other names in the category are largely more attractive, Chantico Global founder and CEO Gina Sanchez said in the same "Trading Nation" interview.

Not only did Wendy's largely underperform its peers over the course of the coronavirus pandemic, but its expectations coming out of lockdown fall short as well, said Sanchez, also chief market strategist at Lido Advisors.

"Their expectations coming out of the pandemic are OK, they're not bad, it's a proven business model, but they're not as good as the rest of the group," she said.

"Brinker — that just didn't do very well during the pandemic — has huge expectations coming out," she said. "And so, this stock compared to other stocks just isn't as attractive."

Disclaimer

Read More