Cramer says Wendy’s stock is expensive: here’s why he is right

Fast-food chain stock Wendy’s Co. (NASDAQ:WEN) on Tuesday skyrocketed more than 25% to trade at $28.70 per share after becoming the latest victim of meme stock speculation. CNBC’s Mad Money host Jim Cramer immediately tweeted, saying the current WEN stock price is overvaluing the company. Wendy’s is now trading at new record highs. The stock is up more than 34% this year, which means it could still go higher.

What Jim Cramer got right

Wendy’s shares are now trading at a price-earnings ratio of 44.97, which is relatively high for a food chain stock. The average P/E ratio for restaurant brands as of June 7 was 32.86. Therefore, WEN stock looks massively overvalued compared to close peers, which makes Cramer’s assessment correct.

Are you looking for fast-news, hot-tips and market analysis?

Sign-up for the Invezz newsletter, today.

Even when we factor in expected earnings growth for the next 12 months, WEN’s forward P/E ratio of 32.28 is only slightly lower than the current industry average. It leaves little room for upside potential. 

Wendy’s most recent quarterly results posted a bottom-line growth of 186.40% (YoY), resulting in earnings per share surprise of 36.91%. According to estimates, earnings per share will grow at a slower rate of about 15% next year. Therefore, there is not much to look forward to that supports the current price rally.

Foot traffic trends aren’t contributing to the bullish charge. According to data compiled from Olvin’s analytics platform called Almanac, we can see that changes in visits at Wendy’s outlets across the US are trending in the wrong direction since the start of 2021.

The chart below also shows that Wendy’s is underperforming its chief rival, McDonald’s Corp (NYSE:MCD). This may further spoil the Reddit WSB party as it signals Wendy’s is not making any gains against McDonald’s, which is a key thesis to the long-term bull story.

Technical overview

Technically, WEN shares appear to have surged to the overbought levels of the 14-day RSI. The massive spike in the stock price is likely to cause a short-term pullback. Wendy’s stock also trades significantly above the 100-day moving average, which increases the chances of the stock price declining.

Looking forward, investors can target bullish profits at around $28.64 or higher at $30.10. The key support levels are $25.53 and $24.26. The support levels are also good targets for investors looking to short WEN shares.

Bottom line: Wendy’s stock price rally could be overblown

Wendy’s shares are trading at record highs after Tuesday’s gigantic spike. Cramer thinks that retail investors speculating about WEN stock’s upside potential are overblowing their optimism. However, meme stock investors do not seem to care much about the fundamentals. They bet on the hype, and that seems to be what is happening with WEN shares. 

The problem is once the sentiment changes to bearish, WEN stock could come down crashing. It is best to watch it closely and wait for a better opportunity to open up when Wendy’s stock price pulls back.