My Favorite Trade in this Booming Sector

Business is booming for retailers that sell jet set goods at affordable prices. It's a business model that has rewarded shareholders of companies like Whole Foods Markets (Nasdaq: WFM), up more than 4,600% in 20 years, and Monster Beverage (Nasdaq: MNST), which has gained more than 80,000% over that time.

Two of this year's hottest IPOs are profiting from the same trend: Michael Kors Holdings (NYSE: KORS) is up more than 80% in less than 5 months of trading, and Annie's (NYSE: BNNY) soared more than 100% from its IPO price in its first week.

In other words, companies that sell affordable luxuries are great trading candidates... and I think I've found the next big winner.

Consumer spending is driving retail stocks higher, and restaurants are seeing some of the biggest gains in retail spending, according to a monthly retail spending report issued by the Census Bureau. Increased consumer spending coupled with good management has driven shares of restaurateur Ruth's Hospitality Group (RUTH) up 980% in the past three years.

I think there's still plenty of money to be made with these shares, and right now we have a trade setup where a nearby support level can help limit the potential risk.

Ruth's Hospitality Group operates restaurants in the United States and internationally. It owns the Ruth's Chris Steak House and Mitchell's Fish Market brands. They operate about 130 Ruth's Chris Steak House restaurants and more than 20 Mitchell's Fish Markets. The restaurants are well diversified geographically, spread across 29 states and in seven countries. They are known for cooking steaks in a 1,800 degree oven and using serving plates heated to 500 degrees so that customers can hear the steaks sizzle as they are brought to the tables.

The company reported that same store sales growth, a key measure of success for retailers, increased by 7.7% at Ruth's last year. They have seen seven consecutive quarters of same-store sales growth and eight consecutive quarters of traffic gains in the Ruth's Chris brand. They have also been profitable in each of the past three years, and analysts expect the profits to continue growing -- RUTH is expected to to increase earnings-per-share to $0.48 from $0.39 in 2011.

RUTH is currently trading near a three year high. It sold off with the rest of the stock market last summer, and we can use that decline to generate a price target for the subsequent recovery. The stock fell $3.31 from its July high of $7.10 before bottoming at $3.79 in October. Market tend to move with a degree of symmetry, so we can add the size of the drop to the top of the pattern. That gives us a price target of $10.41 in RUTH, a potential gain of about 39%.

The chart also shows an intermediate term target of $9.15. This is 61.8% of the size of that move from last summer. That is a key Fibonacci ratio, and those ratios are widely used by technical analysts to find price targets.

Support for stocks that are breaking out to the upside should be found at old highs, in this case $7.10. This is very close to the current price action and offers a low-risk stop level for traders.