The consensus view on restaurant stocks is that consumers have been cutting back and not dining out as often as they have in the past.
And there sure seems to be some truth to that theory, as many of the stocks in the group get mediocre to poor scores when measured by our stock grading tool, Portfolio Grader.
Bigger names like McDonald’s (MCD) and Darden Restaurants (DRI), for example, get sell ratings since they have simply been unable to sustain any type of revenue or earnings growth in the current consumer environment.
But not all restaurant stocks are struggling. When consumers do venture out to eat, they are showing a lot of loyalty to certain chains — and a few companies have excellent fundamentals as a result.
Take a look at the two best stocks to buy now for investors craving a pick in the restaurant space.
The Best Restaurant Stocks to Buy Now
Chipotle Mexican Grill (CMG) has lots of devoted followers, and the fundamentals of CMG stock reflect that fact. Chipotle earnings for the third quarter came out last week, and CMG blew away sales expectations.
Unlike many other chains, CMG is enjoying double-digit year-over-year revenue gains, with sales leaping by 18% in Q3. Same-store sales also rose by more than 6% and almost all CMG locations reported higher traffic than the same period a year ago.
Chipotle earnings per share did fall a little short, coming in at $2.66 vs. expectations of $2.78. But that was because CMG margins got squeezed on higher food costs. The good news: Chipotle is defying the industry-wide trend and is planning price increases menu-wide. That will help protect CMG margins and drive further revenue growth in the last quarter of the year.
The strong sales in last week’s Chipotle earnings report resulted in an upgrade to “A” last week by Portfolio Grader. CMG stock is now a strong buy.
Another stock to buy is Famous Dave’s (DAVE), a company that 187 Famous Dave’s restaurants in 37 states, including 54 company-owned restaurants and 133 franchise-operated restaurants.
DAVE reported a solid second quarter back in July with same-store sales up almost 4% year-over-year. The company easily exceeded analyst earnings estimates, posting an EPS of 30 cents vs. expectations of 23 cents.
Earlier this month, Famous Dave’s also announced a deal for 12 more franchised locations in New York, Maryland, Michigan, Ohio and Puerto Rico that will help deliver future growth for the chain. No wonder Wall Street has been raising its estimates for the fourth quarter and next year.
The continued fundamental improvement has been noted by Portfolio Grader, and DAVE stock was upgraded to an “A” last week. The shares are a strong buy at the current price.
The bottom line is that, while consumers may be dining out less, they are being very selective when they do head out for dinner.
These two chains have captured consumers’ hearts and wallets, and the underlying stocks should keep doing well as fundamentals continue to improve.
Portfolio Grader can help us spot the best stocks to buy now and position our portfolios to order up only the very best dining stocks out there.
Louis Navellier is the editor of Blue Chip Growth.