Finding great restaurant stocks isn't always easy, but with a strong U.S. economy and Americans spending an average of more than $200 per month on eating out, ignoring this industry could be a mistake.
So which restaurant companies look like top stocks to buy right now? To help you answer that, we asked three Motley Fool contributors for their picks. They made a case for Wendy's (WEN 2.96%), McDonald's (MCD 1.25%), and Chipotle (CMG 0.41%). Here's why.
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It's hip to be square
Anders Bylund (Wendy's): In the words of investing guru Warren Buffett, "It is far better to buy a wonderful business at a fair price than a fair business at a wonderful price."
That what you get from an investment in Wendy's. The stock has gained 11% in the last six months and 26% year to date, and it trades at a meaty 26 times forward earnings, or 63 times trailing free cash flows.
At the same time, Wendy's sports some of the widest gross margins in the fast food industry, coupled with fantastic returns on equity and a rock-solid balance sheet. Insiders own more than 7% of the stock's outstanding shares, ensuring that management's goals are aligned with those of its investors.
In short, Wendy's is poised to continue a long-term trend that has doubled its share price in four years. The S&P 500 only delivered a 36% return over the same period. If that's still not enough to persuade you, Wendy's also brings a generous 2% dividend yield to the party.
This is a well-run business with a clearly defined business strategy -- focus on product quality over cost savings -- and a shareholder-friendly setup in the corner offices and boardroom. There is no bad time to start a position in a high-quality stock like this one.
A value meal in a stock
Rich Duprey (McDonald's): It's almost time to begin thinking of McDonald's as a technology company as much as a restaurant chain. It has been deploying technological innovations at its restaurants to speed up the order and fulfillment process in a bid to improve the customer experience.
From installing self-serve ordering kiosks (which tends to increase the average check amounts because people buy more when they place their own orders) to adding artificial intelligence at the drive-through window that makes order suggestions based on what's popular that day or even what the weather is like, McDonald's is relying less upon fallible humans and more on robots.
Although the initial outlay for such equipment is expensive, McDonald's is looking to boost order value. And if the meals are served correctly and more often, and quicker, customers will return and boost individual restaurant traffic. Ultimately it will trickle down to the fast-food giant's bottom line.
Having returned to its roots of offering a good, tasty meal at a good price, McDonald's saw comparable-store sales grow by their widest margin in four years, rising 6.5% from last year, while earnings jumped 7% from the year-ago period.
There's been a lot of talk about a looming recession, with yield curves inverting, various economic metrics giving off mixed signals, and the stock market making wild swings. But even in a downturn, people have to eat, and having positioned its menu as a value leader once again, McDonald's stands to benefit if things go south.
McDonald's stock isn't the cheapest, but it's long defied expectations. Since it is back in its wheelhouse while also adding more technology to its operation to improve its business, it's one stock to still buy.
Chipotle's turnaround continues chugging along
Chris Neiger (Chipotle): While some investors may still be a little skittish about investing in Chipotle in the wake of several food-safety issues since 2015, the company has continued to show improvement across many key metrics.
For example, in the company's second-quarter results, total sales climbed 13% year over year to $1.4 billion, and its digital sales skyrocketed by 99% (and now account for 18% of the top line). Additionally, comparable store sales were up an impressive 10%, which was the company's sixth consecutive quarter of accelerating comps.
All of these metrics helped Chipotle increase its operating income by 77% year over year to $120 million and boost its diluted earnings per share by 92% from the year-ago quarter to $3.22.
At 47 times the company's forward earnings, Chipotle's stock isn't exactly cheap right now. But with digital sales humming along and comps experiencing impressive growth, it's clear that Chipotle has made the right changes to lead to the company's turnaround. All of which means that investors may want to take a closer look at this restaurant stock.
