Was Bill Ackman right in selling Starbucks stock and buying Domino’s Pizza stock?

Billionaire hedge fund investor Bill Ackman revealed on Wednesday that his fund Pershing Square Capital Management sold out its stake in multinational Coffeehouse Starbucks (NASDAQ:SBUX) in favor of a 6% stake in the global restaurant chain Domino’s Pizza (NYSE:DPZ). 

Domino’s shares spiked 4.4% in the morning before pulling back to end the day up just 0.73%. On the other hand, Starbucks experienced a steady decline throughout the day to close 2.93% down from Tuesday’s close.

Starbucks’ quick recovery

Starbucks is up 89% since recovering from the February-March, 2020 plunge driven by the pandemic. This rally has pushed the company’s valuation to a trailing 12-month P/E ratio of about 131.50 based on Wednesday’s closing price. This is nearly three times its 5-year average P/E of 44.47. From this perspective alone, it looks like Starbucks is significantly overvalued at the current price of $109.80 per share.

Technically, the stock appears to be on a downfall with potential support levels located at around $108.04 and $105.92. The recent channel breakout suggests that the downward movement could continue.

Domino’s potential upside

On the contrary, Domino’s Pizza has gained just 41.84% since bottoming on March 20, last year. The stock also trades at a relatively attractive P/E ratio of 34.49, which is slightly below its 5-year average of 35.47. In 2017, the stock reached a maximum P/E of 46.77. The average P/E for the US restaurant market stands 39.37, which means that Domino’s has an upside potential of more than 14% if it can rise to trade at par with close peers.

Technically, Domino’s shares appear to have pulled back following Wednesday’s early morning spike. The stock broke out of the ascending channel formation in the 15-min chart before pulling back to return to the normal trading zone of the strength indicator down below. There is an immediate support level at $419.81 and another one at $409.88.

Domino’s has momentum on its side

Almanac is an artificial intelligence powered platform that leverages billions of real-world data points to provide data and insight into traffic trends. Taking a look at the chart below shows that visits to Domino’s stores across the US remains elevated.

Granted, traffic trends have dipped from peak levels but this shouldn’t come as a surprise as many states eased restrictions on indoor dining. But the fact that visit trends continue to trend notably higher on a year-over-year basis may signal demand for consumption of pizza at-home remains strong. 

Was Ackman right to ditch Starbucks for Domino’s?

Based on the analysis, it looks like Ackman was right. Starbucks appears to be on the way down in the short-term while Domino’s has significant upside potential. For this reason, buying Domino’s now looks exciting especially after Wednesday’s late pullback. It may be wise to stay away from Starbucks for now and observe how the stock performs in the next few weeks before buying.