3 Restaurant Stocks to Put on Your Blacklist

by Tim Melvin | August 4, 2014 9:02 am

I have never been a fan of so-called “casual” dining restaurants — not as eateries, nor as investments. (For dining options, I have a huge preference for locally owned places.)

restaurant stocks
Source: Flickr[1] | Flickr[2] | Flickr[3]

Earnings growth for most restaurant stocks that play the casual market is sustainable only by continuously opening new locations, and the multiples investors are willing to pay are universally too high for my tastes. I have been around this business for years and have many friends who own eateries and bars, so I’m well aware of how difficult a business it is.

The only time in the past three decades that I have been even mildly excited about restaurant stocks was in 2009 when the high-end eateries sold off with the market. Obviously, the wealthy still had some money left and weren’t going to stay home, so I bought some higher-end dining stocks like Ruth’s Hospitality (RUTH[4]) with satisfactory results.

Looking at some of the recent earnings reports just underscores my dislike for these restaurant stocks. Here are three to avoid or even sell.

Restaurant Stocks to Sell – Buffalo Wild Wings (BWLD)

Buffalo Wild Wings NASDAQ:BWLD[5]As much as I like a good sports bar, I have no interest at all in visiting or buying shares in Buffalo Wild Wings (BWLD[6]). Sports bars should be local joints owned by a fan and named “Nick’s” or “Joe’s.” BWLD had decent results in its most recent quarter, with about 7% same-store sales growth, but I have to question the wisdom of paying 37 times earnings for a wings-and-beer joint.

About 3.3% of the quarter’s growth is attributed to World Cup viewing, and that is not going to be replicated for another four years. BWLD’s numbers aren’t horrible — they just don’t justify the price.

Restaurant Stocks to Sell – Ruby Tuesday (RT)

Ruby Tuesday NYSE:RT[7]I have been in a Ruby Tuesday (RT[8]) three times in my life. Based on those three experience, I am not shocked that the company is losing money or that investors are dumping the stock following the recent earnings release. Ruby Tuesday lost less money this year in the second quarter than it did back in 2013, but that’s not much to get excited about considering revenues shrank by 6.6% while same-store revenues were down by 5.3%.

Rather than expanding, the chain is closing locations to get control of costs and profit margins. There is nothing special about this chain, and I see no reason to own RT stock right now.

Restaurant Stocks to Sell – Cheesecake Factory (CAKE)

cheesecake185[9]My wife is a big fan of the Cheesecake Factory (CAKE[10]), but I confess to not sharing her enthusiasm. Apparently a lot of people share my opinion, as results were tepid at best in the second quarter; same-store sales were up just 1.2% year over year.

The one thing CAKE does have going for it is that management is somewhat shareholder-friendly; the company recently raised its dividend by 18%, and the company is buying back stock. However, I question the real value of buybacks at 20 times earnings and more than four times book value.

As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities.

  1. Flickr: http://www.flickr.com/photos/jordyrc/
  2. Flickr: http://www.flickr.com/photos/boutmuet/
  3. Flickr: http://www.flickr.com/photos/brokentaco/
  4. RUTH: /stock-quotes/RUTH-stock-quote/
  5. [Image]: https://investorplace.com/wp-content/uploads/2012/06/BuffaloWildWings185.jpg
  6. BWLD: /stock-quotes/BWLD-stock-quote/
  7. [Image]: https://investorplace.com/wp-content/uploads/2012/06/RubyTuesday185.jpg
  8. RT: /stock-quotes/RT-stock-quote/
  9. [Image]: https://investorplace.com/wp-content/uploads/2013/02/cheesecake185.jpg
  10. CAKE: /stock-quotes/CAKE-stock-quote/

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