Restaurant stocks have been a tricky industry for investors over the past year. But because the economy remains strong, these stocks should do well. After all, what’s one thing people like to do when they have a little extra cash? They like to go out and grab something to eat. It’s a little luxury.
However, not all restaurant stocks are created equal. Customer tastes can be fickle, and a stock can fall in and out of favor with a change in menu — or even without one.
So which restaurant stocks are worth a look? Below are a few not-so-obvious names. At least, not ones many investors are considering.
Restaurant Stocks for 2018: Wendys (WEN)
When fast-food stocks enter the conversation, McDonald’s (NYSE:MCD) is the first that comes to mind for most. However, we shouldn’t overlook Wendys (NASDAQ:WEN).
Aside from winning on social media, WEN stock could be a winner too. A look at the charts show a potential new range in Wendys. After using $15.75 as resistance for some time, that level turned to support. Then $17.50 was resistance, but will it now be support? That’s the hope as WEN stock has continued to advance.
Now trading at about 22 times this year’s earnings, it’s not screamingly cheap. But it has got solid growth and continues to tell a good story. Restaurant renovations are helping bring in new customers and Wall Street is taking notice.
Analysts expect Wendys to grow earnings by 30% in 2018 and another 21% in 2019. On the revenue front, expectations call for 30% growth this year and 4% next year. The ballooning difference in revenue is from the “buy and flip” method the company is using to sell restaurants to franchisees, giving a big boost to near-term sales.
In any regard, last quarter Wendys strung together its 21st consecutive quarter of positive comp-store sales, an impressive feat. Additionally, WEN pays out a 2% dividend yield.
WEN stock may not be for everyone, but if it can move into a new channel, perhaps we see new highs.
Restaurant Stocks for 2018: Texas Roadhouse (TXRH)
It’s no secret that Texas Roadhouse (NASDAQ:TXRH) has been hot, but with a sub-$5 billion market cap, it may not get much recognition in the stock market.
At that size though, could it be in play? We saw Panera Bread bought out for $7.5 billion and Buffalo Wild Wings acquired for less than $3 billion. In this area, TXRH could certainly be in play. But like Campbell Soup Company (NYSE:CPB), we need to see solid fundamentals before dipping our toe in.
Luckily, TXRH has just that.
Analysts expect revenue growth of 10.6% this year and 10.7% next year. That goes alongside a 22% bump in earnings in 2018 and another 13.5% boost in 2019. On the comp-store sales side, first quarter company-owned stores logged 4.9% growth. Management said through the first four weeks of the second quarter, comps were tracking above 8%, an impressive acceleration of growth.
Trading at around 30 times earnings, investors can see why there’s a debate on TXRH. Consistent growth (and a 1.5% yield) are attractive, particularly at this market cap. But 30 times earnings isn’t cheap. If we get a pullback into the $55 to $60 area though, Texas Roadhouse would be a lot more attractive for longer-term buyers.
Restaurant Stocks for 2018: Starbucks (SBUX)
Go ahead, call me crazy. But if anything the fall in Starbucks (NASDAQ:SBUX) at least warrants a look. Over the past 25 years, there hasn’t been a better restaurant stock investment. Since its IPO in 1992, SBUX has embarrassed its peers and, while well off its highs, still sports a $70 billion market cap.
Shares were hammered last week as management signaled a shift from growth to focusing on profits and capital return. While that may have momentum players running for cover, that’s not the worst thing to hear. Remember, SBUX stock boosted its dividend payout by 20% last week.
That follows its decision to add 100 million shares to its buyback plan in April, bringing the total to 124 million shares. That’s good for almost 10% of the outstanding share count.
Finally, it plans to return $25 billion to shareholders through fiscal 2020, a 66% increase from the previous forecast of $15 billion.
Starbucks is focusing on closing underperforming stores and maximizing margins, (again, you could hear worse things as an investor). Its plans in China are still firing on all cylinders and that is its growth engine, not the U.S. Now the U.S. serves as its bread-and-butter profit machine; an investor ATM, if you will. The CFO and executive chairman are leaving, but that could just pave the way for new blood and fresh ideas.
At 16 times this year’s earnings, it’s not screamingly cheap. But for double-digit revenue growth this year and double-digit growth estimates for earnings this year and next, investors could do worse than buying SBUX stock. It’s also worth noting is that it now pays out a nearly 3% dividend yield.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell was long SBUX.
