With consumers still hurting despite inflation moving in the right direction (down), the concept of top restaurant stocks to buy might seem a tad too risky. Nevertheless, contrarian investors may be able to benefit from certain air pockets in the economy.
First, the AP reported that retail sales increased a better-than-expected 0.7% in July, as compared to the prior month. This data point demonstrates that even with consumers feeling the pressure, they’re still opening their wallets. That’s a broadly positive sign for the best restaurant stocks to buy. Second, not all eateries are obviously the same. Some enterprises that focus on low-priced comfort food and beverages may perform quite well. That’s especially the case if social trends return to full normal.
With that, below are intriguing restaurant stocks to consider.
Restaurant Stocks: McDonald’s (MCD)
A fast-food icon, McDonald’s (NYSE:MCD) makes a strong case for top restaurant stocks to buy. Aside from high-end events, the Golden Arches fill many everyday needs. For example, when you’re on a road trip and you have nowhere else to go, it’s usually a safe bet that a McDonald’s will be open (or at least its drive-thru will be). In some ways, then, McDonald’s is almost an infrastructural play.
However, the main reason to target MCD centers on its potential to steal market share from Starbucks (NASDAQ:SBUX). If the consumer economy continues to come under pressure, I don’t think your average household can afford to continue forking over premium dollars for Starbucks coffee. Instead, they’ll trade down, which would benefit low-cost operator McDonald’s.
Another top reason to target MCD is institutional options flow. Throughout August, institutional traders appear to have made big block trades favoring MCD. In the most recent sessions, traders have sold put options, which carry an optimistic framework.
Papa John’s (PZZA)
One of the top pizza joints, Papa John’s (NASDAQ:PZZA) had a bit of a public relations nightmare a few years back. I’m not going to rehash the controversy but suffice to say, management made significant efforts to restore the brand. Since the Jan. opener, PZZA slipped more than 4%. Nevertheless, the institutional traders want to give Papa John’s the benefit of the doubt.
Throughout the month of August, data from Fintel shows movement for big block trades, specifically involving sold puts. To quickly recap, put options provide stakeholders the right but not the obligation to sell the underlying security at the listed strike price. Buying puts has negative implications. By logical deduction, selling puts carries positive implications.
During the Aug. 21 session, traders sold PZZA puts with a strike price of $67.50 and an expiration date of Oct. 20. It’s unlikely that PZZA – which presently stands at $75.69 – will fall that low. Therefore, it’s a subtle indication that the institutional players believe in PZZA.
Restaurant Stocks: Dave & Buster’s Entertainment (PLAY)
A restaurant and entertainment business, Dave & Buster’s Entertainment (NASDAQ:PLAY) stood as a hallmark of the pre-pandemic work ecosystem. It wasn’t at all unusual for people to attend happy hours at Dave & Buster’s to let off some steam. Obviously, the Covid-19 crisis and the subsequent work-from-home directive changed circumstances. However, if the remote operation narrative pivots back to the old normal, PLAY could be due for big gains.
So far, the market appears to be warming to the concept. Since the Jan. opener, shares gained over 13% of equity value. However, they still stand at a discount if you’re looking for undervalued restaurant stocks to buy. For instance, PLAY trades at 5.11x operating cash flow, below the sector median of 9.98x.
However, a more compelling argument is institutional trading. On Aug. 16, traders bought call options in a multi-sweep transaction or orders across multiple exchanges simultaneously. Further, the strike price on these options – which expire on Nov. 17, 2023 – sits at $40. Given that shares are trading at $40.18, this call can potentially rise in value.
Yum! Brands (YUM)
Based in Louisville, Kentucky, Yum! Brands (NYSE:YUM) operates several fan favorites, including KFC, Pizza Hut, Taco Bell (well, some folks must like it) and The Habit Burger Grill. Of course, the exception here is China. If you want exposure to that market for the aforementioned brands, you must buy Yum China (NYSE:YUMC). However, with the world’s second-largest economy also suffering challenges, it might make sense to invest domestically.
Interestingly, the alpha dogs of Wall Street may have the same idea. On Aug. 17, traders initiated a multi-sweep transaction for YUM calls. These options feature a strike price of $130 and an expiration date of Sept. 15, 2023. Currently, YUM trades hands at $129.45 after losing more than 6% of equity value in the trailing month. However, more recent trades appear encouraging for bulls, possibly making YUM one of the best restaurant stocks. Finally, Yum features strong revenue growth and high-profit margins. Even if a recession hits, the company’s low-cost leaders should keep the corporate umbrella afloat.
Restaurant Stocks: Denny’s (DENN)
Known as America’s diner, Denny’s (NASDAQ:DENN) is an important cog in the consumer ecosystem. No, it’s not exactly what you call a Michelin-star restaurant. However, when you’re looking for something to eat because every other place is closed, (many) Denny’s locations fill that gap. Also, should full normalization materialize in the workplace, the diner may see a resurgence in demand.
If I’m reading the tea leaves correctly, some institutional traders have the same idea. Specifically, on Aug. 2, traders sold put options in a multi-sweep transaction. Specifically, these puts expire on Sept. 15, 2023, and have a strike price of $10. At the moment, DENN trades hands at $9.86. But given that DENN swung up over 3% on Tuesday, there’s a good chance that the put sellers will be able to keep their premium.
On the financials, Denny’s could use improvements in the top line. However, it’s consistently profitable, commanding a trailing-year operating margin of 13.23%. In contrast, the sector median sits at only 3.25%. In addition, DENN trades at a discounted forward multiple of 15.91x.
Shake Shack (SHAK)
One of the top restaurant stocks to buy based on market performance, Shake Shack (NYSE:SHAK) has, so far, expertly climbed the wall of worry impacting many other discretionary consumer plays. Since the beginning of this year, SHAK gained almost 70% of its equity value. In the trailing one-year period, shares moved up nearly 44%. Still, it’s a tricky narrative. For example, in the past five sessions, SHAK slipped about 7%.
If you can handle the risk, SHAK could be one of the best restaurant stocks to put on your radar. That’s because the institutional traders seem to like it. On Aug. 17, Fintel reported big block trades for $77.50 SHAK calls with an expiration date of Sept. 15, 2023. Unfortunately, the recent losses have forced SHAK conspicuously out of the money. Still, there’s a chance here, with shares gaining 3% on Tuesday.
Financially, SHAK is a risk because of the lack of consistent profitability. However, for a near-term trade, it could be interesting.
Carrols Restaurant (TAST)
While Carrols Restaurant (NASDAQ:TAST) might not be a household name, its top brands certainly are. Per its public profile, Carrols is the largest Burger King franchisee in the world. It also owns and operates 55 Popeyes restaurants. If you doubt that consumers are spending so much at retailers, just look at TAST stock. It gained almost 400% of its equity value since the start of the year.
And the really crazy part? The institutional folks seem to believe that more upside could be on the way. On Aug. 10, Fintel reported big block trades for $6 TAST calls. At the time the trade was carried out, TAST had a spot price of $7.625. Given that these options are in the money, TAST will need to move a bit more to be net profitable. Still, with momentum at its back, who’s going to question it?
In the spirit of full disclosure, its financials aren’t great. However, in the second quarter, Carrols’ $485 million in sales represented an increase of nearly 10% year-over-year.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.