Investors looking for small-cap restaurant stocks to buy got great news in August.
The restaurant industry released its sales numbers for August on Sept. 7. They were the best results since September 2015, with same-store sales up 1.8% including 2.9% growth in the final week of the month.
“At the end of July there was concern that restaurant sales might be slowing and the much-awaited recovery might be coming to an end,” said Victor Fernandez, vice president of insights and knowledge for TDn2K, a data analytics company that specializes in the restaurant industry. “Nonetheless, sales in the first three weeks of August, which were pre-hurricane, were up 1.5 percent. Had this been the final result for the month, it would still have been the best performance since September of 2015, and it represented a 0.9 percentage point improvement over July’s same-store sales.”
Although the natural inclination is to pick out the largest restaurant chains in the nation, if you’re interested in snagging bigger gains, you might want to consider these seven small-cap stocks in the sector.
Small-Cap Restaurant Stocks to Buy: Shake Shack (SHAK)
I have a confession to make: I’d completely lost track of Shake Shack (NYSE:SHAK) until putting together my picks for this gallery.
Back in February 2016, I recommended investors pick up SHAK stock. At the time, it was trading around $34.
My argument was that it was trading around three times sales compared to 2.3 times sales for Chipotle Mexican Grill (NYSE:CMG) at approximately the same time in its growth trajectory.
Today, Shake Shake trades around 3.9 times sales, which isn’t too pricey for a company that’s still growing in a restaurant environment that’s much stronger.
“Restaurant stocks are back in favor,” stated Piper Jeffrey senior analyst Nicole Miller Regan in August on CNBC. “And there’s not another company-owned domestic model with double-digit growth that’s putting up positive comps. Shake Shack’s in a category of their own.”
Indeed it is. $95, here we come.
Small-Cap Restaurant Stocks to Buy: Wingstop (WING)
It has been nine months since Roark Capital paid $2.4 billion to acquire Buffalo Wild Wings. The private equity firm bought the restaurant chain after a year-long proxy fight that ended in long-time CEO Sally Smith retiring after two decades running the restaurant stock.
Roark paid approximately 1.2 times and 17.5 times its 2016 sales and operating income respectively. It had an operating margin of 6.9%.
In Q2 2018, Wingstop (NASDAQ:WING) grew same-store sales by 4.3% at its U.S. stores. That’s on top of 2% same-store sales growth a year earlier.
More importantly, its asset-light business model delivered an operating margin of 26.8% in the second quarter; for the trailing 12 months, it’s got an operating margin of 34%, making it a very profitable business.
“Wingstop completed another strong quarter of growth on both the top and bottom lines as we continue positioning ourselves to become a top 10 global restaurant brand,” CEO Charlie Morrison stated in its press release. “We are effectively executing against our four growth strategies: building greater awareness through national advertising, innovating through technology to enhance the guest experience, optimizing delivery in test markets ahead of a national roll out in 2019, and expanding our international presence.”
WING stock is up 70% year to date.
While it’s doing a good job for investors, it’s not cheap, trading at 51 times operating income.
It’s expensive, I’ll grant you. However, in three-to-five years you will have forgotten how overvalued it was.
Small-Cap Restaurant Stocks to Buy: BJ’s Restaurants (BJRI)
Talk about a stock that’s on fire. BJ’s Restaurants (NASDAQ:BJRI) is up 16% over the past month. That’s almost four times the entire restaurant category, which is also experiencing significant momentum.
In mid-August, I recommended BJRI stock as an alternative to Goldman Sachs’ conviction buy pick, Performance Food Group (NYSE:PFGC).
It is up almost 16% since then versus a slight dip for PFGC. It’s still early days, I’ll grant you, but I’m pretty confident you’ll see that same outperformance over the next year and beyond.
The fact is, despite the run-up in its stock, BJ’s is still trading at just 12.6 times cash flow. And that’s great news when you consider that it has completely turned around its business from this time last year.
In fact, in the second quarter it grew same-store sales by 5.6%, 70 basis points higher than in the first quarter — a sign there’s plenty of growth left in BJ’s tank.
Small-Cap Restaurant Stocks to Buy: Sonic (SONC)
Of all the companies on my list of small-cap restaurant stocks to buy, Sonic (NASDAQ:SONC) is doing the worst regarding positive comps.
In the third quarter ended May 31, Sonic saw same-store sales decline by 0.2%. However, compared to the same quarter last year, which saw same-store sales decline by 1.2%, it’s headed in the right direction.
As we sit here today, Sonic is not a cheap stock, trading at 16 times cash flow. And it doesn’t look like the moves it’s making to revive sales will deliver enough growth in the fourth quarter to move the needle on its valuation and share price.
However, the fact that it has kept a lid on costs over the past year, leading to improved free cash flow — it expects $60 million for fiscal 2018, more than double fiscal 2017 — suggests any real move in same-store sales in the next 2-3 quarters should push SONC stock higher.
In the meantime, enjoy its 1.7% dividend yield and aggressive share repurchase program.
Small-Cap Restaurant Stocks to Buy: Denny’s (DENN)
Denny’s (NASDAQ:DENN) stock had come a long way from the 2009 market bottom when it was trading below $2. Up over 800% since then, the easy money has already been had.
Now it’s got to deliver on its plan to sell more food 24/7 and not just at breakfast and late night. Part of that plan includes Denny’s on Demand that allows customers to order online for takeout or delivery at any time of day.
It seems to be working.
If you look at the share of Denny’s transactions that are off-premises, they’re almost equally divided amongst breakfast, lunch, dinner and late night. Even better, 61% of its online sales are from people between the ages of 18 and 34, creating a nice mix between visits in-restaurant and off-premises.
The other transition involves making the restaurants more attractive.
“They got a little cold,” said CEO John Miller in a January interview with Jim Cramer. “67% of the system is on the new image and about 80% by the end of fiscal 2018.”
Add to this its $2, $4, $6, $8 value menu, and you’ve got an asset-light business model that’s ready to take off.
Next stop, $20. Perhaps higher.
Small-Cap Restaurant Stocks to Buy: Ruth’s Hospitality (RUTH)
If you bought IPO shares of Ruth’s Hospitality Group (NASDAQ:RUTH) when it went public at $18 a share in August 2005, today you’d be sitting on a 4.1% annualized total return.
That’s not a horrible return given that RUTH stock traded below $1 as recently as March 2009. If you bought at the bottom of the market back in 2009 and still hold today, you’re sitting on a 49% annualized total return.
Those are two entirely different perspectives, wouldn’t you say?
I no longer eat meat, so I’ve lost touch with the Ruth’s Chris story. However, business appears to be doing just fine.
In the second quarter ended July 1, 2018, Ruth’s Hospitality increased revenue by 9.6% to $109.6 million with the all-important same-store sales metric improving by 1.3%. Meanwhile, on the bottom line, profits rose 23% to $9.6 million.
It’s the perfect time for long-time CEO Michael O’Donnell to hand over the reins to COO Cheryl Henry.
“I am incredibly proud of the team we have assembled here at Ruth’s Hospitality Group and of our many accomplishments over the last 10 years,” O’Donnell stated in the company’s Q2 2018 press release. “The Company is well-positioned for continued success, due in large part to initiatives designed and implemented by Cheryl Henry, our new Chief Executive Officer.”
O’Donnell joined the company at a difficult time in its history, in August 2008. Since then, he has done a great job reviving both the company and its stock.
He’s leaving the CEO position on a high note.
Small-Cap Restaurant Stocks to Buy: Ark Restaurants (ARKR)
Although Ark Restaurants (NASDAQ:ARKR) is the smallest of these small-cap stocks at $79 million, it has some interesting restaurants among its empire of 22 locations in seven states.
In the third quarter ended June 30, 2018, it had revenue of $44.8 million, 8.3% higher than a year earlier thanks to 2.3% same-store sales growth.
Its two biggest markets by revenue are Las Vegas and New York, which accounted for 55% of its revenue in Q3 2018 and saw same-store sales growth of 3.2% and 4.7% respectively in the quarter.
Regarding profits, it grew operating income by 54.7% to $3.8 million — an operating margin of 8.5%, 260 basis points higher than a year earlier.
CEO Michael Weinstein along with the rest of the company’s officers and directors own 43% of its stock, keeping them incentivized to deliver results on both the top and bottom line.
Call this a hunch, but with an earnings yield of 6.2%, 140 basis points higher than the S&P 500, ARKR stock is a decent value proposition.
Should it fall below $20, I’d be a big buyer because it hasn’t traded below that level on a consistent basis since 2013.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.