Where to Start Looking for Restaurant Stocks

Investors might want to continue to mine the fast-casual niche for their best investment ideas.

Jul 28, 2014 at 2:16PM


Investing in a restaurant is like choosing one for dinner, requiring more than a determination of whether you like its food. Sure, you want an enjoyable meal, but you probably don't want to wait an hour for a table or drive 50 miles to get there. For investors, buying what you know is a good start, but whether a restaurant is growing sales, losing market share, or occupying a favored niche are considerations investors also must take into account.

NPD Group just released its latest quarterly update on restaurant industry growth, showing us where diners prefer to spend their money and where we, as investors, might want to channel our dollars.

In an all-too-common refrain, market researchers say the U.S. restaurant industry remains stagnant, with consumer traffic flatlining this past quarter. Despite seeing tens of millions of guest visits over the past 12 months, NPD sees little hope for consumers turning out en masse again like they did before the recession. The report adds some bulk to the poor results we've seen from the likes of McDonald's (NYSE:MCD) and Darden Restaurants (NYSE:DRI)

Screen Shot

Source: NPD Group. 

Traffic in the mid-level dining market that encompasses midscale eateries and casual dining restaurants is still on the wane, with the segments losing 2% to 3% customers from the year-ago period. Those are both one percentage point worse than the numbers realized in the first quarter.

At the investor level we've seen continued sluggishness in Darden's Red Lobster and Olive Garden chains, where second-quarter same-restaurant sales were down 5.6% and 3.5%, respectively, but also at DineEquity's (NYSE:DIN) Applebee's chain, where comps fell 0.5% in the first quarter. Even Brinker International's (NYSE:EAT) Chili's saw barely positive comps of 0.7%. Both DineEquity and Brinker report second-quarter numbers within the next couple of weeks, and investors shouldn't expect anything better from either of them.

While McDonald's poor results would seem to belie the flat results of the quick-serve segment -- the first time in many quarters the niche hasn't produced positive traffic growth -- it's because the sector is again bolstered by the fast-casual component (including Chipotle (NYSE:CMG), which continued to record traffic gains. Fast food, on the other hand, McDonald's home, was down 2% year over year.

Not surprisingly, after Chipotle's recent better-than-expected earnings report, fast casual remains strong, though the Southwest grill continues to dominate the space. It's same-restaurant sales surged over 17% on the strength of increased traffic, which grew an equally robust 12.3% over the year-ago period. Even recently IPO'd Zoe's Kitchen (NYSE:ZOES), a new entrant in the fast-casual category, is trending above the average, with comps up almost 6% on a 4% increase in traffic.


Source: SXC.hu.

The other category seeing growth is upscale restaurants, which recorded 4% traffic gains in the quarter and underscored just how well the well-to-do have made out in this otherwise lame recovery. Ruth's Hospitality Group (NASDAQ:RUTH), which runs the upscale Ruth's Chris Steakhouse, enjoyed comps increases of 2.6% on 1.4% more traffic. While Darden Restaurants' Capital Grille fine dining chain also scored 4% higher comps in its fourth fiscal quarter, its Longhorn Steakhouse also remains classified as one of its growth concepts where overall sales rose 11% as comps climbed 2.4%, perhaps proving that beef remains popular no matter the price point.

In short, investors should continue to mine the fast-casual niche for their best investment ideas instead of looking more broadly at the industry as a whole. Although low valuations may be a tempting morsel for your portfolio, fighting the tide of consumer sentiment can be difficult, and with industry trends favoring continued growth in certain sectors ahead of others, it could just be easier pulling a seat up to the table where everyone else is dining.

Risk-free for 30 days: The Motley Fool's flagship service
Tom and David Gardner founded The Motley Fool over 20 years ago with the goal of helping the world invest...better. Their flagship service, Stock Advisor, has helped thousands of investors take control of their financial lives and beat the market. Click here to sign up today.

Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, McDonald's, and Zoe's Kitchen. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information