The fundamentals supporting fast food stocks are healthy today, and project to remain healthy for the foreseeable future. That’s why I’m bullish on a select list of fast food stocks here and now.
Favorable fundamentals will drive out-sized profit growth for these companies, and that growth will push their stocks higher over the next several months and years.
Here’s the fundamental backdrop. You have a healthy U.S. economy with low unemployment, big wage gains, low borrowing rates, and high consumer confidence. Putting all that together, the U.S. consumer today is about as healthy and as prone to spend as ever.
Meanwhile, consumers are increasingly fixated with elevated convenience and fast service, so they are increasingly drawn to fast food chains. These fast food chains are simultaneously re-inventing their menus to be more relevant, including incorporating healthier and trendier items like plant-based burgers. They are also improving the ordering process to be more convenient, and those improvements center around pairing up with online food ordering and delivery services.
All in all, the fundamentals supporting fast food stocks are quite favorable. Stronger consumers coupled with smarter menu innovation and a strong delivery buildout equals strong growth for fast food chains.
With that in mind, let’s take a look at 6 fast food stocks to buy for healthy gains over the next several quarters.
Fast Food Stocks to Buy: McDonald’s (MCD)
At the top of this list, we have McDonald’s (NYSE:MCD), the king of the fast food industry that has been king for a long time, and projects to remain king for a lot longer thanks to its continued market-leading innovation.
On the menu front, McDonald’s has refreshed its menu from head to toe over the past several years. The company pioneered the All-Day Breakfast trend. They then introduced more chicken items onto the menu and more premium meat offerings.
They’ve run promotions such as 2-for-$5, which have been huge successes. They’ve also incorporated bacon into their classic offerings. The company has also dabbled in the plant-based meat craze, offering the plant-based Big Vegan TS in 1,500 restaurants in Germany in April.
Meanwhile, on the convenience front, McDonald’s has rapidly scaled its presence in the delivery world. By most metrics, McDonald’s now has one of the biggest delivery presences of any fast food chain. Also, McDonald’s has integrated technology into its ordering processes. Many in-store ordering kiosks are now touch-screen, self-order kiosks.
All in all, McDonald’s has continued to improve its menu and service over the past the several months and years. These improvements put the company in a favorable position to grow for the foreseeable future as the U.S. consumer economy picks up steam.
Next, we have Yum (NYSE:YUM), the parent company of KFC, Taco Bell and Pizza Hut.
With respect to menu innovation, Yum has done very well. Taco Bell is perhaps the market leader in menu innovation, seemingly rolling out a new, millennial-focused food item every few weeks.
Taco Bell has also created ad campaigns to accompany those menu adds (see this Nacho Fries ad), and those campaigns only add to their appeal. KFC and Pizza Hut have been relatively light on the menu innovation front but have still kept their menus up-to-date with current consumption trends. KFC is also thinking about incorporating plant-based options on its menu, too.
On the convenience front, Yum has also rapidly expanded its delivery capability through a big partnership with GrubHub (NYSE:GRUB). Those delivery efforts for Taco Bell and KFC are still in their early days, with positive early reception and momentum. As such, the delivery expansion tailwind should remain vigorous for the foreseeable future.
In sum, Yum’s unique marketing and menu innovation, coupled with delivery build-out at Taco Bell and KFC, should help drive healthy sales and profit growth over the next several quarters.
Jack in the Box (JACK)
The third fast food stock which looks ready to rally is Jack in the Box (NASDAQ:JACK).
On the menu front, Jack in the Box has taken a unique and strategic approach to wallet share expansion and promotions. With respect to winning wallet share, Jack in the Box didn’t just invent new menu items – they invented an entire new mealtime, which they dub “late-night”. This late-night menu caters to those who get hungry well past dinner hours, and in creating this menu, Jack in the Box has won consumer wallet-share. Meanwhile, Jack in the Box is finally figuring out how to create discounted combos which offer great value to the consumer without cutting into margins.
Meanwhile, like many of the other chains on this list, Jack in the Box has rapidly scaled out its delivery capabilities over the past few years. At the end of last quarter, roughly 90% of all Jack in the Box locations were serviced by at least one delivery service. Thus, as the delivery market gains traction over the next several years, Jack in the Box will be fully levered to that growth, and consequently grow with the market.
Overall, Jack in the Box’s unique approach to menu additions and promotions, on top of its already huge delivery network, gives the stock a healthy growth outlook over the next several quarters.
Shake Shack (SHAK)
Next up, we have rapidly expanding premium fast casual chain Shake Shack (NYSE:SHAK).
Shake Shack seems to really understand the importance of menu innovation. The company actually has a dedicated kitchen – dubbed the Innovation Kitchen – for testing and developing new products and LTOs (limited time only offerings). This Innovation Kitchen has cooked up some big new menu adds over the past few months, including Chick’n Bites and new unique shake flavors like tiramisu. So long as Shake Shack keeps pouring resources into the Innovation Kitchen – and so long as that Innovation Kitchen keeps pumping out exciting, new menu adds – Shake Shack’s comparable sales performance should remain healthy.
With respect to elevated convenience, the delivery business is rapidly scaling, and the company is doing everything it can to optimize that delivery business. Shake Shack is refreshing many of its stores to allow for a more streamlined and efficient pick-up process. All the new units are also being built with this in mind, too.
Broadly, Shake Shack continues to put menu innovation and digital convenience at the forefront of its growth narrative, and in so doing, exposes itself to big growth potential over the next several years.
Domino’s Pizza (DPZ)
One of the more interesting fast food stocks on this list is Domino’s Pizza (NYSE:DPZ).
On the menu front, Domino’s – like many of its peers on this list – is one of the more innovative chains in the fast food world. Domino’s started off as a pizza parlor. They are so much more than that now. The menu today includes pasta, chicken, sandwiches, and more. Further, Domino’s has been very innovative with its marketing, including doing things like fixing pot holes so consumers don’t drop their pizzas. In sum, these menu adds and marketing have kept Domino’s atop the pizza game by a wide margin.
The convenience story is a bit different. Unlike the other chains on this list, Domino’s didn’t just build out its delivery business. Domino’s has been a delivery business for a long time. As such, the macro-delivery tailwind isn’t really a tailwind at all for Domino’s. Instead, it translates into more competition in the delivery space.
Nonetheless, DPZ’s sustained dominance atop the pizza market has enabled it to offset increased delivery competition, and the company has reported healthy comps for the past several years. So long as this remains true, DPZ stock should march higher.
Restaurant Brands International (QSR)
Last, but not least, on this list of fast food stocks to buy is Restaurant Brands International (NASDAQ:QSR), the parent company of Tim Hortons, Popeye’s, and Burger King.
Menu innovation has been core to each three of QSR’s big chains. Tim Hortons introduced multiple new items to its menu in 2018, including several new hot and cold beverages. Tim Hortons also rolled out Breakfast Anytime. Over at Popeye’s, management has relied on LTOs and promotions to drive continued positive comps, such as the $5 tackle box and $5 shrimp offer. Meanwhile, Burger King is on the cutting edge of plant-based meat, and has already launched Impossible Whoppers, which have created a huge traffic surge at participating locations.
With respect to convenience, QSR has invested in all the right things to maximize consumer convenience. The company has built out its delivery network to span about half of all its U.S. restaurants. The company has also invested big into self-order kiosks, mobile app ordering, and digital menu boards.
Net net, QSR has done everything right over the past several quarters on the menu innovation and consumer convenience fronts, and those right moves lay the groundwork for QSR stock to rally over the next several quarters.
As of this writing, Luke Lango was long MCD, GRUB and DPZ.