What (Non-Tech) Stock Outperformed Apple?

I have a question for you, my faithful trading friends:  Precisely what constitutes a “technology” stock?

Here are the top holdings in the XLF ETF.

That is not as nonsensical question as it may seem. I do grant that Wall Street authorities rather smugly seem to assume that they are the arbiters of that which is a “tech stock”. For example, see the list of stocks that the Technology Specter SPDR Fund ETF (XLK) identifies as the “Top Ten” tech stocks.

And if you are willing to grant that the Internet plays a key role within the Tech Space… then the PowerShares NASDAQ Internet ETF (PNQI) would also offer authoritative insight regarding which stocks are “Tech” stocks. See the list of its top stocks!

Here are the top ten holdings within the PNQI ETF.

 

So we see that AAPL and AMZN are two major “Tech” stocks!

If we can agree that every diversified portfolio should include (at least in the long-term) some “Tech” equities, what if I told you I had the name of a stock that has outperformed both AAPL and AMZN during the past two years?  Even better, the stock I have in mind is nowhere near being in the sphere of “tear your face off with Volatility” stocks!

Do I have your interest?

Below is a two-year graph comparing our “feature” stock (in Blue) vis-à-vis the internationally renowned AAPL (Green) and AMZN (Brown):

Wow! Our feature stock has doubled the return of AMZN and totally trounced the stock that (when Steve Jobs was alive) used to be the “Darling” of Wall Street!

Do you want to know more about this stock that, despite your misleading preconceptions, I consider a “Tech” stock?

Well you are in luck!!  Unlike many articles that you’ll find on the Web these days, I don’t require that you “register” your contact information with me or pay some negligible fee to receive all of the details!!

No… instead, I offer you these valuable insights regarding this feature stock absolutely free!

Our feature “Tech” stock is PAPA JOHN’S INTERNATIONAL (PZZA)!

Calm down, calm down now! Don’t go all “You’re crazy! You are absolutely crazy! PZZA is simply a pizza company… there is nothing “Tech” about it!

Well, that is unfortunate! Despite your tender age, you are suffering from a severe case of “hardening of the categories”!

Of course PZZA is a Pizza company!  Duh!

But it has also become a “Technology” company in the sense that it was an early adopter within its industry of all that the tools of “Tech” and “Mobile Tech” could offer to boost its customer reach, improve the customer experience, leverage sales, and reduce expenses!!

Consider these “signposts” of the “Technological Achievements” of PZZA:

1)    PZZA founder, John Schnatter, grew up in (much less than metropolitan) Jeffersonville, Indiana[1],  and opened up his first pizza place in 1985 after graduating from Ball State University;

2)    In one of the key insights that has driven his business since its beginning, Schnatter discerned that customer ordering habits would evolve (ie. change) as the Internet grew in size and scope!!

3)    That insight prompted Schnatter to continually invest in updated technology to reach more customers more significantly, more efficiently, and more positively!

4)    In 2001, Papa John’s was the first national pizza company to offer online ordering for all of its delivery restaurants throughout the U.S.[2];

5)    Similarly, in 2007, Papa John’s became the first national pizza company to offer SMS text ordering for all of its delivery restaurants in the U.S.

6)    And, in 2010, Papa John’s became the first national pizza company to launch a nationwide digital rewards program, Papa Rewards, which remains the only program of its kind in the category.

7)    By January of 2014, PZZA became the first national pizza company to utilize a (system-wide) mobile-optimized Website (powered by CashStar) that improves digital gift card ordering for customers.

1. By going to papajohns-m.cashstar.com , a customer can design and fund a personalized Papa John’s Pizza gift card… as well as designate a specific delivery date!

8)    Currently, PZZA accrues over 45% of its sales via online orders… the largest in the industry!

1. It fully expects to become the first nationwide Pizza Company to boast of over 50% online sales during the 2014 fiscal year!

9)    Along the way of its tech evolution, PZZA recognized the need for a flexible, low cost, and labor efficient (ie. minimal labor involved) IT system for its network! Therefore, in late 2004, PZZA moved to an Open-Sourced based OpenNMS Solution … with these results:

1. Dramatically reduced operating costs;
2. Improvement in network performance/reliability;
3. Faster, more secure, more flexible, more scalable system!

10) In 2010, the network manager (Chris Rodman) described the system in these terms:

1. Our busiest dataflow for online ordering is dinner and lunch on Friday, Saturday and Sunday. Despite this, we could operate throughout the weekend with one staffer – for all of Papa John’s 3,400 locations – if needed.

Recognizing that their “Tech” pioneering as a key way to differentiate its company, the decisions and priorities of PZZA management propelled PZZA to the forefront of “Pizza Tech”.

This chart illustrates the many tech “milestones” of PZZA!

Of course, PZZA has not thrived ONLY because of its TECHNOLOGY! After all, on the typical Friday night, I don’t suddenly find myself with a irrepressible craving for good pizza technology!  I want pizza!

Another insight Schnatter had from the beginning is that customers want “fresh”. “quality”, and “value”… as well as “taste”! Here is PZZA’s “Mission Statement”:

“Papa John's will create superior brand loyalty, i.e. “raving fans”, through (a) authentic, superior-quality products, (b) legendary customer service and (c) exceptional community service.”

PZZA continues its pledge by customer through its “Pizza Story”:

“At Papa John's many things guide us toward excellence, but nothing is as important as our commitment to quality. We pride ourselves in providing a menu that's prepared with only the finest ingredients. From fresh vegetables to our never frozen, hand-tossed original dough and superior-quality tomato sauce, we strive to exceed your expectations. We even take special care to ensure all of our pizzas are made with zero trans fat. Combine our total commitment to quality with our superior ingredients, and the result is pure pizza excellence.”[3]

There is little doubt that Schnatter has achieved impressive success in his efforts as founder and CEO of PZZA – operating/franchising pizza delivery and carryout restaurants around the world[4] under his iconic trademark[5].  PZZA has grown to become the world’s third-largest pizza company.[6]

Look at this map of PZZA locations as of September, 2013:

Note the nearly 190 locations in China. Growth there is currently a priority… notably causing a bit of a drag on earnings growth, but holding the prospect of greater growth in years to come!

Domestically, the largest growth in PZZA locales is targeted to happen in the Northeast, Northwest, and Canada.

PZZA has been succeeding among consumers, earning consistently high ratings among those surveyed through the American Customer Satisfaction Index (ACSI):

One of the major side benefits of its pioneering tech infrastructure is PZZA’s ability to access a wealth of information about its customers… thereby allowing PZZA management to utilize that information as it shapes decisions regarding menu, pricing, marketing, future store locations, etc. [7]

From a financial point of view, one of the most significant decisions made by PZZA management in recent years has been the very shareholder-friendly strategy of stock buy-backs (as well as a modest dividend). In fact, since 1999, 100% of Free Cash Flow (FCF) has been used to repurchase stock.

In the APPENDIX, I provide a couple of slides illustrating financial growth during the most recent three years.  I don’t think I need a chart or a slide to illustrate the growth in the brand awareness of PZZA. Anyone who is a regular viewer of TV sports is not only aware of PZZA… but can most likely identify founder Schnatter in a crowd (especially because of his bright, crimson red PZZA shirt!). He is most likely in the top ten of the best-known CEO’s within the United States.

In fact, a 2013 survey reported that “Avid NFL Fans” pegged PZZA as the “Most Identified NFL Brand Sponsor”. More recently, PZZA demonstrated its willingness to “Dance”… as it devoted a major chunk of its marketing budget to ads appearing in the recent NCAA Basketball Tournament (the “Big Dance”). In these spots, Schnatter personally delivered one or more pizzas to a celebrity customer… and the conversation that ensued touted characteristics that differentiates PZZA from the other pizza restaurants.

Referring to Schnatter as the “face” of PZZA brings to mind one other very crucial dimension of the shareholder-friendly nature of PZZA!  Schnatter “eats his own cooking!!” Most critics of corporate management consider it a huge “red mark” against the credibility of management if/when corporate leaders do not own a very significant portion of company shares!  In that instance, it is hard to imagine that shareholder interests and the interests of management are truly and fully aligned!

There is no such problem with PZZA!  Take a look at this list of PZZA’s biggest stakeholders:

Schnatter owns 25% of the company… four times more than the next highest stakeholder!

By now, I am sure you have become conversant with most of the corporate features and competitive advantages of PZZA. That is interesting, and might enhance our enjoyment of an online pizza order.  However, why would a trader or investor be interested in PZZA?

Let’s take peek at some different views of PZZA price action.

Below is a two-year graph that compares PZZA with Buffalo Wildwings (BWLD), Domino’s Pizza (DPZ), Wendy’s International (WEN), and the S&P 500 Index.  This graph shows that PZZA dominated these other restaurant companies during almost all of this two-year period! It more than tripled the appreciation of the index!

Here is a two-year chart comparing PZZA with its bigger rival, DPZ:

And a 1-year chart:

Finally, a 6-month chart:

What we can see is that we should all have purchased PZZAabout two years ago, and then sold it in mid-March of this year!  We would have made a tidy profit!

We also notice that the PZZA price has been tailing off since then.

INVESTOR TAKEAWAY:  We all understand why/how Wall Street slices and dices stocks into particular categories…. And why PZZA is not thought of along Wall Street as a “Tech” stock.

However, I hope you understood the point of my question at the beginning of this article!  In this “Age of Mobile Technology”, every consumer company in every “Space” needs to have (or develop) an effective “Mobile Strategy”.

PZZA is an exceptional example of such a consumer company.  Since (essentially) PZZA’s beginning, John Schnatter recognized the centrality of evolving technology within the optimum execution of his business plan!  The fact that PZZA has been a pioneer (within the pizza space) regarding the integration of IT in its daily operations distinguishes the company and its CEO within the industry.

It bears emphasizing what a “big deal” PZZA’s initial moves in IT were at the time of introduction. Here is a recent quote from the Chief Marketing Officer (CMO) at PZZA (Bob Kraut):

“We were the first to offer online ordering in every Papa John's location. Not in a certain part of the country. Not in terms of franchisees who said ‘Yeah, I'll do it.' Our entire system in 2001 went online. You could get a pizza from us, from the smallest market to the largest market. Wherever we had a store, you could buy it online. That's what we were trying to get across with our message of digital leadership.”

Given all of the above, what could a trader or investor consider with regard to PZZA?

If you examine the chart below (including 8-day EMA in Red and 21-day EMA in Green; RSI and Slow Stochastics below the chart)…  you’ll see an area of support in the $46 area that has held since mid-January.

Although I absolutely do not recommend any security (see “Disclosure” at the end), a devotee of risk management who has been impressed by PZZA’s two-year momentum could consider selling a bull put spread at or below $46 (take your pick).

If you do end up with a bull put spread, you might also consider selling a bear call spread at or above $54 once PZZA hits $50 (forming an Iron Condor).

DISCLOSURE:  I do not own PZZA. More significantly, my family is divided with regard to “pizza supremacy”. My two adult boys are divided between Papa John’s and Dominos. My wife and adult daughter are quite partial to Lou Malnati’s Pizza (largely localized to Chicago). I am a “diehard” fan of Malnati’s “Lou’s Salad”… but can be quite satisfied with pizza from DPZ, PZZA, Malnati’s, or Rosati’s (another Chicago brand).  That being said, I am extremely impressed by John Schnatter. 

Nothing in this article is intended as a recommendation to buy or sell anything. Always consult with your financial advisor regarding changes in your portfolio – either subtractions or additions.

APPENDIX:
Notice the dip in sales in 2010… followed by a solid recovery!

Also notice how more efficient PZZA has become with regard to its tax rate!

Imagine how much better that tax rate could be if it moved to Ireland!!   (It does have 51 units located there!!  But the rumor that PZZA’s product is delivered in Ireland by Red Leprechauns is totally false!!)

FOOTNOTES:

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