2 Fast Food Stocks to Buy, and 2 to Avoid

fast food stocks - 2 Fast Food Stocks to Buy, and 2 to Avoid

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One of the most sustainable benefits of President Trump’s administration is gastronomical in nature. Between election day until the end of March 2017, consumer expenditures on food products jumped 2.8%. In contrast, the “Obama effect” on food consumption increased a barely discernible 0.4%. While it’s arguable whether America is great again, but Americans are certainly eating again. Naturally, this trend has positive implications for fast food stocks, as well as more traditional restaurant stocks.

In addition to the growing momentum in food purchases, the food and beverage service sector is also experiencing bullishness.

In the first quarter of this year, the industry increased sales by nearly 4.2% against the prior year. This is a fairly solid start considering that the sector boosted sales by 5.5% in 2016. Due to a combo of higher employment stats and perhaps post-election blues, people are eating everywhere — home or away. Again, this is a strong tailwind for fast food stocks.

However, not all establishments are feeling the benefits. Many traditional, “sit-down” restaurant stocks have been hurting, and have resorted to cutting costs. For example, in American food capital New York City, employment rates at full-service restaurants have been flat since summer 2015. The same trend can be seen in California restaurants over the past year.

This doesn’t mean that all fast food stocks are viable investments, either. The broader retail market is undergoing massive changes. As technologies such as e-commerce and peer-to-peer networks improve, the consumer is becoming more picky. Thus, investors also have to keep a discerning eye.

Here are two fast food stocks to buy, and two you should avoid.

Fast Food Stocks to Buy: McDonald’s Corporation (MCD)

Fast Food Stocks to Buy: McDonald’s Corporation (MCD)
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Source: Source: JYE Financial, unless otherwise indicated

First, we can look at the fact that MCD is up an astonishing 18.6% year-to-date. This is more than double the performance of benchmark indices. I like the words of InvestorPlace contributor and editor of Profitable Investing Richard Band: “McDonald’s market size is a moat in itself.” Although MCD is not as nimble as smaller restaurant stocks, it has enough leverage to overcome almost any market storm.

Second, investors are loving McDonald’s international markets. According to Mr. Band, the “U.K., Canada, China and Japan all showed strong improvement” in revenues for Q1 FY2017. Even more impressive, the bullish trend is developing despite a strong dollar. The greenback is near multi-year highs, while international currencies, particularly the yen, are near multi-year lows. This creates unfavorable currency dynamics for American companies with international businesses.

Nevertheless, MCD is simply shrugging off all its challenges. It may not be a culinary favorite, but McDonald’s knows how to serve its shareholders well.

Fast Food Stocks to Buy: Wendys Co (WEN)

Fast Food Stocks to Buy: Wendys Co (WEN)
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Source: Source: JYE Financial, unless otherwise indicated

But fast food stocks have benefited tremendously from the American appetite for all things burgers, and Wendys Co (NASDAQ:WEN) is a prime example.

WEN follows McDonald’s “keep it simple” approach with a twist — offer distinctly great-tasting food for the money. This strategy has served them well over the past several years. But they’re definitely not afraid to mix things up.

In February, WEN announced plans to “install self-ordering kiosks at 1,000 of its locations across the United States in 2017.” Most of the targeted stores will receive three kiosks, putting the “fast” in fast food stocks.

At the same time, Wendy’s will decrease their labor costs, and hopefully boost their revenue. Although management has implemented financial discipline, sales have declined faster than the savings can compensate. So far, investors are loving the changes at Wendy’s. Shares are up 13% YTD, riding a bullish trend channel going back at least five years.

With Americans showing increased appetite, the rising tide for restaurant stocks will carry WEN even higher.

Fast Food Stocks to Sell: Shake Shack Inc (SHAK)

Fast Food Stocks to Sell: Shake Shack Inc (SHAK)
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Source: Source: JYE Financial, unless otherwise indicated

Another problem is Shake Shack’s most recent earnings report. Although SHAK beat on both the top and bottom lines, comparable sales surprisingly went into red ink by 2.5%. Analysts were expecting the opposite — growth of 0.2%. CEO Randy Garutti tried to put out the fire by stating that impacted stores were “most affected by cold weather and the holiday shift in March.”

Although Garutti’s explanations are sound, analysts likely anticipated some weather impacts. After all, most of their locations are in cold-winter areas. And that segues into another weakness of SHAK — expansion potential. Shake Shack can currently get away with serving overpriced burgers and fries in New York City. But to do that in Mobile, Alabama? Again, it would take something special.

Unfortunately, SHAK suffers from duplicity. It has a wonderful, niche product that doesn’t do anything productive for shareholders.

Fast Food Stocks to Sell: Buffalo Wild Wings (BWLD)

Fast Food Stocks to Sell: Buffalo Wild Wings (BWLD)
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Source: Source: JYE Financial, unless otherwise indicated

However, it is up double-digits since the second-half of March. BWLD also has a rabid fan base, with over 16 million people visiting its Facebook page, and 12.5 million of which gave it a “like.”

As with Shake Shack, Buffalo Wild Wing’s popularity isn’t translating to shareholder returns. Since the beginning of January 2014, BWLD stock has only gone up 10%. Such slothful movements have driven many investors crazy with frustration. Its mercurial rise of 101% in 2013 is now just a faded memory of what could have been.

Some entities aren’t willing to let things slide, and activist investor Marcato Capital is one of them. The hedge fund complains that BWLD has underperformed benchmark restaurant stocks. To reverse this trend, they’re calling for management to franchise a vast majority of its store locations.

Marcato’s suggestions sound great in principle. However, contentious relationships aren’t my idea of a good opportunity. Multiply that sentiment twice over for cut-throat fast food stocks.

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


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/2-fast-food-stocks-to-buy-and-2-to-avoid-mcd-wen-shak-bwld/.

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