Is Domino’s Recent Dip a Recipe for Long-Term Gains?

January 10, 2025 at 07:36 AM EST

West Bangal, India - August 21, 2021 : Dominos pizza on box stock image. - Stock Editorial Photography

Markets are very rarely efficient, and most hedge fund managers and investors throughout history have proven this. If markets were efficient, then no trader or investor would be able to outperform the market unless they had insane amounts of leverage or access to illegal insider information.

That being said, there is a clear inefficiency in the consumer discretionary sector today, specifically in food and restaurant stocks. Investors should take a deeper look at this inefficiency today and consider closing it down for their own portfolios in 2025 because these sorts of gaps don’t usually last long once the rest of the market—and Wall Street—gets a handle on them.

The price action in shares of Domino’s Pizza Inc. (NASDAQ: DPZ) relative to other pizza chain brands like Papa John’s International Inc. (NASDAQ: PZZA) will bring the prospect of a misprice to investors, one that Wall Street analysts will indeed become aware of in the coming months. Taking a look at the performance of Chipotle Mexican Grill Inc. (NYSE: CMG) can also bring additional evidence of this mispricing opportunity in the affordable food chains space.

Wall Street’s Favorite Metric Has Failed

When analysts and portfolio managers at big banks and hedge funds manage their positions and ideas, they usually weigh the potential outcome in terms of beta. Beta is a measure that determines how volatile a stock is today compared to the S&P 500 index, so a higher beta (above 1.0) means a stock that is more volatile than the market.

The opposite can be said for a beta measure below 1.0, meaning the stock is less volatile and safer than the broader market. With this in mind, investors can see how the differing price actions in these three stocks have failed the basic premise of professional money managers.

With a low beta of 0.90, Domino’s Pizza stock has underperformed Chipotle Mexican Grill stock over the past 12 months by as much as 27%. Yet, considering that Chipotle has a significantly higher beta of 1.3, recent pullbacks in the S&P 500 shouldn’t have been harsher on Domino’s Pizza stock.

While Chipotle stock trades at 85% of its 52-week high, which is considered bullish territory, Domino’s Pizza stock has fallen to only 72% of its 52-week high, which is conversely bearish territory for the company. It almost seems like the heavy underperformance in Papa John’s stock might have dragged Domino’s Pizza down by association, and if that’s the case, then investors should get excited.

The Difference Maker for Domino’s Pizza Stock

Of course, it is a correlation selloff because neither the beta nor the fundamentals between Domino’s Pizza stock and Papa John’s would suggest that Domino’s should be trading this low compared to its 52-week high price. There is one main difference maker in the stock, a financial metric, that investors should be aware of in Domino’s Pizza stock today.

That metric is the return on invested capital (ROIC) rate, which is responsible for compounding itself and creating the sort of “I wish I had bought " reaction when investors look at a stock's long-term price chart. With an ROIC of over 61%, Domino’s Pizza sock fits that description perfectly.

Compared to Papa John’s ROIC of roughly 31%, it would seem that a correlation selloff might not be justified after all. Recently, some on Wall Street have become aware of this inefficiency and decided to take matters into their own hands, such as those from FMR LLC, who boosted their positions in the company by 16.3% as of November 2024.

This new allocation would net their position at a high of $941.9 million today, or 6.3% ownership in the company. Acting as another bullish gauge for investors to consider Domino’s Pizza a potential buy in this recent pullback, there’s also much more evidence to keep track of.

Analysts from Loop Capital also held a Buy rating on the company as of November 2024, this time boosting their valuations to a high of $559 a share to call for a net upside of 35.4% from where the stock trades today. This bold call is not only born out of the inefficiencies pointed out above but also from the stock’s outstanding discount.

Compared to the retail sector’s average 98.4x price-to-earnings (P/E) valuation, Domino’s Pizza offers a significant discount through its 25.4x multiple today, which is also severely compressed compared to its long-term average valuation of 35.0x.

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Is Domino’s Recent Dip a Recipe for Long-Term Gains?

Wall Street’s Favorite Metric Has Failed

The Difference Maker for Domino’s Pizza Stock

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