So long, The Restaurant ETF (NASDAQ:BITE), we barely knew you. Created less than 15 months ago, the theme-oriented exchange-traded-fund was liquidated on Dec. 23. The relatively quick closure of BITE, which was focused solely on U.S.-listed restaurant stocks whose market caps were $200 million or more and had at least $1 million in daily trading volume, was the the first of its kind.
Unfortunately, it never found acceptance with ETF investors.
Lo and behold another ETF provider has swooped in to try and capture the audience BITE sought — USCF Restaurant Leaders Fund (NYSEARCA:MENU) inception was Nov. 8 — but it remains to be seen if USCF Advisers LLC will be any more successful than ETF Managers Group was.
For whatever reason investors just don’t have an appetite for restaurant ETFs despite the fact that restaurants are one of the biggest contributors to the U.S. economy.
It’s a paradox to say the least.
If you look at the performance of many of the stocks in both BITE and MENU, you’ll see that many of them did well this past year. Further, restaurant stocks as a whole generated an annual total return of 12.4% over the past three years through Jan. 6; 236 basis points better than the S&P 500.
Don’t throw the baby out with the bathwater because there are some quality restaurant chains worth owning.
These are the three restaurant stocks to buy in 2017.
Restaurant Stocks to Buy in 2017: Arcos Dorados Holding Inc (ARCO)
My first restaurant selection is Arcos Dorados Holding Inc (NYSE:ARCO), the world’s largest McDonald’s Corporation (NYSE:MCD) franchisee with more than 2,100 restaurants in Latin America and the Caribbean.
I’ve been a fan of the Uruguay company as far back as 2011, when I recommended that investors sell MCD stock and buy ARCO instead.
Unfortunately, the economic situation in South America in subsequent years went a little haywire; the Brazilian Real lost 43.8% of value in relation to the U.S. dollar, making the call a colossal failure down 74% in the four years since.
Which makes its current price below $6 extremely attractive in my opinion — and yes, you have every right to be skeptical given my previous call.
But know this: Excluding currency, ARCO’s business is doing very well and while I wouldn’t recommend you make this one of your biggest holdings, I do believe the comp growth it has delivered in recent quarters — up 15.6% in Q3 2016 — demonstrates that the fundamentals of its business are sound.
Eventually, ARCO will be worth far more in the eyes of investors.
Restaurant Stocks to Buy in 2017: Chipotle Mexican Grill, Inc. (CMG)
Bill Ackman had a terrible year in 2016. Through the end of November, his Pershing Square hedge fund was down 13.5% net of all fees. By comparison, the S&P 500 was up 9.8% in the same 11-month period.
So, I’m going out on a bit of limb by recommending anything his firm is keen on. Nonetheless, despite the criticism Chipotle Mexican Grill, Inc. (NYSE:CMG) has faced for giving into Ackman’s demands to increase the board by more than 30% to 12 members from eight with two being chosen by Ackman, I do see Pershing Square making money from its 9.9% ownership position.
Why?
Well, as Ackman states in his Dec. 7 shareholder letter:
“We have always believed that a good time to buy a great business is when it is in temporary trouble. While Chipotle’s reputation has been bruised, we think that with the passage of time and improved marketing, technology and governance initiatives, the business will not only recover but become much stronger.”
I couldn’t agree more and said as much in November although it’s clearly not nearly as appealing a brand as it once was. A value play? Sure. Strong grower? I wouldn’t go quite that far.
Restaurant Stocks to Buy in 2017: Dave & Buster’s Entertainment, Inc. (PLAY)
Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) has been through a number of ups and downs over the years. Founded in 1982, it’s on its second go as a public company having been taken public by its private-equity owners in 2014 at $16 per share after an aborted attempt to go public two years earlier.
I wasn’t very keen on its aborted IPO back in 2012, but CEO Steve King has done a good job adapting its business to the digital world that we live in and that’s driving healthy comparable-store sales at its 91 locations in the U.S. and Canada.
InvestorPlace Assistant Editor John Kilhefner reminded readers in early December after PLAY announced its Q3 2016 earnings that it was the company’s ninth consecutive quarterly beat. No wonder its stock is up 221% since its IPO in October 2014.
Looking ahead to 2017, PLAY will go over $1 billion in revenue this year, while opening approximately 10 locations, each of which generates between $8.5 million and $12.2 million in first-year revenue.
With millennials seeking experiences rather than material goods, Dave & Buster’s transformation of its hospitality footprint will pay dividends for many years to come.
While it hasn’t got out of the starting gate very quickly in 2017, down 327 basis points year-to-date relative to the S&P 500 through January 9, any pullback provides investors with a good entry point.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
