The all-day breakfast single-handedly revived McDonald’s Corporation (MCD), which in turn lit a fire under MCD stock. Shares have gained 20% since the world’s largest restaurant chain launched its latest and arguably greatest menu initiative Oct. 6, 2015.
By comparison, the SPDR S&P 500 ETF Trust (SPY) is up just 6% in the same period.
The morning daypart has become the all-day daypart for restaurant chains big or small, whether their customers are quick service, fast casual, casual sit-down, or fine dining. It’s a trend that’s not going to go away, and with that, the lines between the breakfast, lunch, and dinner dayparts have become blurred.
However, despite this melding, let me introduce you to the Breakfast-Lunch-Dinner (BLD) Portfolio — a powerful trio of stocks that should provide investors with plenty of upside over the next five to 10 years regardless of the latest restaurant trends sweeping the nation.
The BLD portfolio provides stocks to buy for every meal of the day.
Stocks to Buy for Breakfast: McDonald’s (MCD)
If you want to construct any portfolio to withstand the ravages of time, you’ve got to have stocks that deliver in good times and bad.
While McDonald’s Corporation (MCD) has had its ups and downs over the past decade, it has managed to deliver an annual total return of 16% to MCD shareholders, outperforming its restaurant peers by 143 basis points.
It did even better against the SPY, bettering the index’s ETF by 870 basis points.
The opportunity for MCD to benefit from all-day breakfast outside the U.S. isn’t going to be easy, but long-term, I don’t see why it can’t be a success in places such as Canada (where I live) and elsewhere.
In Canada, where the supply chain is different than in the U.S., all-day breakfast has yet to be implemented — Canada’s quota-based system sees 90% of its eggs hatched by hens in cages — McDonald’s could have a harder time securing the millions of additional eggs required to satisfy all-day breakfast. Most chains including McDonald’s and breakfast competitor Tim Hortons, part of Restaurant Brands International Inc (QSR), have committed to being 100% cage-free by 2025.
They’ll get it sorted, and when they do, Canada will make an even bigger contribution than it already does.
McDonald’s is the “B” in my BLD portfolio.
Stocks to Buy for Lunch: Zoe’s Kitchen (ZOES)
With the lines increasingly blurred, it has become much harder to find an appropriate lunch representative.
That being said, I think I’ve found one in Zoe’s Kitchen Inc (ZOES), where lunch accounts for 60% of its revenue and dinner the remaining 40%.
Zoe’s announced Q1 2016 results May 31, and they were more than satisfactory. Its total revenue was up 27.6% to $80.4 million in the quarter, with comparable restaurant sales increasing 8.1% year-over-year. On the bottom line, its adjusted EBITDA increased 28.3% year-over-year to $8.3 million.
In the 16 weeks ended April 18, 2016, Zoe’s opened 11 new company-owned stores finishing the quarter with 174. In 2016, it expects to open between 34 and 36 new locations across the U.S.
Zoe’s raised its 2016 outlook and now expects its comparable-restaurant sales to grow by as much as 6% from 2015, with a restaurant contribution margin of at least 20.5%.
Things are looking good for the Mediterranean-themed fast-casual restaurant. Sure, ZOES stock is up 32% year-to-date and could be due for a cooling-off period, but long-term, it has the right stuff to hold its own in the busy lunch crowd.
Stocks to Buy for Lunch: Darden Restaurants, Inc. (DRI)
Darden Restaurants, Inc.’s (DRI) concepts span 1,535 restaurants generating more than $7 billion in annual revenue, so it’s more than likely that most investors reading this article have dined under one or more of Darden’s brands.
At seven brands strong — Olive Garden, LongHorn Steakhouse, The Capital Grille, Eddie V’s, Yard House, Seasons 52 and Bahama Breeze — Darden offers something for every dining occasion and food preference.
Business is going great for DRI at the moment; so good are things that activist investor Jeffrey Smith, head of Starboard Value — the hedge fund that ousted Darden’s entire board in 2014 — stepped down as the company’s chairman in April. He likely figured that six consecutive quarters of comparable-restaurant sales growth was evidence his presence was no longer required.
Olive Garden and LongHorn, which represent 78% of its overall revenue of $5.1 billion for the first nine months of fiscal 2016, delivered 16.1% and 21.5% growth in the first three quarters respectively. Olive Garden, once left for dead, has seen the biggest turnaround at the company with year-to-date comps through the end of February up 3.4%.
What has this turnaround meant for DRI stock? Over the past three years, Darden has achieved an annualized total return of 15.05%, which is 265 basis points better than its restaurant peers.
Long-term I see Darden’s other brands — especially Seasons 52 and Yard House — doing some of the heavy lifting currently shouldered by Olive Garden and LongHorn Steakhouse. This should lead to even greater profitability for the entire company.
For this reason, DRI is my dinner stock to complete the BLD portfolio.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
