Regular readers will know that I’ve been buying up BJ’s Restaurants for sometime now. I first bought at $40 or so, saw it climb to $60+, decided it was overpriced and sold off, making a nice profit. I started buying again when it sank into the 30′s, and then made another, smaller profit this spring by writing covered calls on the position, which eventually resulted in the shares being called away. To read that adventure, the initial post in the series can be found here.
I bought back in, little-by-little, on the way down from there and am now sitting on about a 10% loss. I tried to buy a few more shares last week, only to see the stock rally away from my limit order of around $27.
BJ’s has a chain of casual dining pizza restaurants with microbrew beer. I really like the stock for many reasons. The company is very profitable. They have no debt and a lot of money from operations, meaning that they can use cash from operations to grow and make investments rather than racking up large loans. This says to me that they know how to run a business. They also have plenty of room to expand, currently only having restaurants in less than 20 states.
This issue, however, is the ugly cloud called Obamacare that is hanging over the whole economy. The healthcare law, formally known as the Affordable Care Act (ACA), was supposed to be in full force starting this January. This would mean that employers with more than 50 fulltime employees would need to provide healthcare that meets the standards of the ACA (meaning the cost of the insurance would be higher) to their employees. All insurance plans offered to individuals would also need to meet these standards, meaning that a lot of the plans on the individual market would be cancelled, forcing individuals to go without insurance or pay $200-$500 a month more (or even more than that) for plans with higher limits and more services. Even small businesses that had fewer than 50 fulltime employees would need to provide insurance that meets that new standards if they chose to continue to provide insurance.
The requirement for large employer plans to meet the new standards was delayed a year (probably illegally since the law was never changed by Congress, so this might change suddenly if anyone challenges the delay in court). The requirement for individual plans remains in many states, however, as does the requirement that small employers offer plans that meet the higher standards, meaning they will need to pay a lot more per employee or, more likely, quit offering coverage. This all means that 1) people are going to be paying a lot more of their income towards healthcare (or to pay the 2% of their income-tax if they go without insurance), particularly young, healthy individuals who spend little on healthcare now, 2) a lot of people are going to be placed on part-time status or laid off entirely since the cost to pay for their salary and healthcare cost will be more than they produce by working for the employer, and 3) salary growth will be slowed or salaries will even be cut, if the worker’s share of the health insurance payment grows, as employers deal with higher health insurance costs.
None of this looks good for the mid-priced casual dining segment who get a lot of their income from the disposable income of young people. If suddenly all of the people in their 20′s and 30′s are spending 10% of their income to pay for the healthcare of those in their 60′s – 80′s, they might not have much money left over to go out to eat. Even if they decide to go without insurance and pay the 2% tax, that owuld be $2000 per year out of the pockets of someone making $100,000, which might make those individuals on a mid-level income LA decide to eat in more. Restaurants like McDonald’s might do well as people scale back on their spending, and places like Ruth’s Crisp Steakhouse will probably do just fine since rich people and politicians (whose dining bill is picked up by lobbyists) will still go out for a ridiculously overpriced meals, but places like BJ’s might see a substantial drop in business.
I’ll probably therefore hold where I am and not build on my position in BJ’s. I still like the business, but the effects of the ACA on the segment might be severe. Hopefully as the estimated 80 million people lose their insurance next year when the large employer mandate kicks in, the outcry will be large enough to overturn the law. All of this leads to uncertainty, however, which is what the stock market hates. Expect a bumpy road ahead, even if things continue to go up for a while.
Contact me at firstname.lastname@example.org, or leave a comment.
Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.