Grubhub (GRUB) Could Become a Leading Glamour Stock

November 3, 2017

Grubhub (GRUB) roared ahead 11% last Wednesday on four times its average volume following the company’s earnings announcement.

What I like: The gap on earnings came after GRUB found solid support around the 50 area for a month, despite non-stop news about potential competition. And I really like that the stock ran up another few percent over the next couple of days to new highs. Fundamentally, the company is about four times the size of its nearest competitor in the online food ordering and delivery business, and it’s using that scale to grow rapidly—analysts are now looking for 30% earnings growth in 2018, and I think that could prove conservative.

Any potential problems? The fear of competition has routinely hit GRUB stock, at least temporarily. So, while I think investors are finally getting past those worries, it’s possible another announcement/acquisition by a big firm like Amazon could send GRUB into another correction.

My take: I think GRUB could morph into a leading glamour stock in this market, and with investor perception just beginning to change for the better, it could be near the start of a sustained run! I think the stock is buyable here or on dips of a couple of points, with a stop in the low 50s.

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GrubHub (GRUB) is Buyable Around Here

It’s important to have conviction in a company’s major growth story that, ideally, can play out over many years. One of my favorite ways to find these stories is through Cabot Top Ten Trader—as we’ve continuously refined and improved the system, I’ve found my own research has greatly improved.

Top Ten starts its screening process by looking for the best stocks in the market—our proprietary screens look for a mix of great short- and longer-term relative strength, as well as recent trading volume and some other tidbits. That usually narrows down the list to about 100 stocks—from there, I look through all of them for encouraging chart patterns, growth numbers and, if I don’t already know the story, that as well. That produces each week’s list of 10 ideas, complete with buy ranges, loss limits and one potential long-term growth stock highlighted as our Top Pick.

One recent Top Ten idea that has a great story and is near a good entry point right now is GrubHub (GRUB), a firm which many investors have heard of (and use), but few own. It made the Top Ten cut because of its recent earnings gap, its consistent, dependable results, and the fact that fears of competition are fading.

Here’s what I wrote in Top Ten on May 1.

“GrubHub is the leading online and mobile takeout and delivery ordering platform, which is a true mass market, with $75 billion of takeout and delivery from independent restaurants every year, and that doesn’t include chain restaurants, which would triple that figure. Better yet, GrubHub should remain on top mainly because of the network effect, with the firm’s huge restaurant base (more than 50,000, including new chains like Chili’s, Maggiano’s and some initial rollouts with Subway, Buffalo Wild Wings, Denny’s and more) attracting more customers (8.75 million at the end of March), which in turn leads more restaurants to sign up, and so on. As mentioned above, first-quarter report put competition fears to rest—not only did sales (up 39%), earnings (up 45%) and EBITDA (up 32%) top expectations, but so did user growth (26%), daily orders (up 21%) and gross food sales ($898 million, up 26%). Interestingly, management made a point of saying its growth in Tier 2 and Tier 3 markets outpaced its Tier 1 locations, a sign that GrubHub’s appeal is strong outside the major cities, in part due to a successful national advertising program. Best of all, GrubHub is a win-win for everyone, providing a wide choice for diners and proving to be additive to restaurants’ top line. …”

It’s a very good story, and the stock has settled down nicely after its earnings ramp. I think GRUB is buyable around here and can do very well as a long-term growth stock as the bull market progresses.

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