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2 Best Food Stocks to Watch in June

By Jeremy Bowman - Jun 18, 2021 at 9:00AM

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Take a closer look at these two highfliers in the restaurant industry.

The pandemic affected the food industry in different ways. Restaurant stocks generally faltered as dine-in business was cut off, while grocery stores thrived as consumers stocked up goods from toilet paper to seafood.

The economic reopening appears to be hitting a tipping point in June as COVID-19 restrictions are rapidly unwinding and restaurants are returning to normal capacity. That shift presents an opportunity in the food industry, and it's also worth watching its impact on a pair of two intriguing food stocks: Olo (OLO -3.21%) and Wingstop (WING -0.96%). Let's look at what each one has to offer today.

Several restaurant dishes including pizza, fries, and wings

Image source: Getty Images.

Olo: Modernizing restaurants

Olo, which stands for "Online Ordering," went public in March. The company is essentially a corollary to delivery apps like Uber Eats and DoorDash, but instead of building a customer-facing offering, it's designed for the restaurant. Using its software-as-a-service technology, the company helps restaurants manage online orders since it would be difficult for most operators to build that technology. Though Olo serves the restaurant industry, it is a tech company, and has drawn comparisons to Shopify (NYSE: SHOP), which provides similar services for online sellers.

Not surprisingly, Olo's growth surged during the pandemic as online ordering became a lifeline for investors. In 2020, revenue increased 94% to $98.4 million, accelerating from 59.4% growth in 2019. Its model generates high gross margins with 81% gross margin last year and an operating margin of 16.4%, meaning that it is solidly profitable, a rarity for such a fast-growing company.

Its first-quarter performance was even stronger with revenue jumping 125% to $36.1 million and adjusted operating income increasing 17% to $7.6 million.

But the stock is not cheap. Based on this year's estimates, it trades at a price-to-sales ratio of roughly 40, making it exceedingly expensive even for the cloud sector. While Olo is a clear leader in an important market, the economic reopening could present a substantial challenge as restaurants won't be as dependent on online ordering as they were during the crisis. Olo expects growth to moderate this year, calling for a 41% revenue increase in the second quarter, and just 29% over the last three quarters of the year.

Olo will likely need to top that guidance to keep moving higher from here, and doing so would instill confidence in the company's long-term potential to disrupt a huge market.

Wingstop: A pandemic fast-food winner

Few restaurant chains did as well as Wingstop during the pandemic. Shares of the fast-food chicken wing purveyor are up 78% since the start of 2020, and it posted a blowout 21.4% increase in comparable-store sales in the quarter with systemwide sales rising 28.8% to $2 billion, indicating the company is growing both through expansion and by increasing sales at existing locations. And 2020 also marked its 17th consecutive year of comps growth, a long track record of success.

In many ways, Wingstop seems to resemble Domino's Pizza (NYSE: DPZ), the more mature pizza chain that has been one of the best-performing stocks of the last decade. Like Domino's, Wingstop has a small store footprint, low start-up costs, and a simple menu. Its product also works well with pickup and delivery, which explains its strong growth during the pandemic, and it's sharpening its focus on international markets, where Domino's has had much success as well.

After posting 20.7% comps growth in the first quarter, the company now expects growth to moderate, essentially calling for flat comps for the rest of the year. That's not surprising given its breakout growth last year, though. 

Like Olo, Wingstop shares are pricey, trading at a P/E of 100 based on this year's expected results. Still, the company's growth, profitability, and other key metrics are all impressive, and its concept seems to be resonating both inside and outside the U.S. 

If Wingstop can continue to deliver solid growth over the rest of the year even against difficult comparisons, the company could be on its way to being the next Domino's.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Shopify. The Motley Fool recommends Domino's Pizza, Uber Technologies, and Wingstop and recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Olo Inc. Stock Quote
Olo Inc.
OLO
$8.13 (-3.21%) $0.27
Wingstop Stock Quote
Wingstop
WING
$134.53 (-0.96%) $-1.30

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