Restaurant stocks may be heating up after a few high-profile IPOs in recent years, and it's easy to see why individual investors flock to hot eateries. They are simple businesses to understand, and it's easy -- if not satisfying -- to kick the tires.
However, there are some publicly traded chains that are better positioned to thrive as investments given today's climate and their own fundamentals. Let's take a look at the three best stocks to invest in restaurants.
1. Brinker International (EAT -2.97%)
Brinker may not be a household name, but its flagship chain -- Chili's Grill & Bar -- is a shining star in casual dining. At a time when many iconic eateries are faltering, Chili's continues to grow in popularity.
Brinker owns, operates, or franchises 1,585 Chili's and another 49 Maggiano's Little Italy. It has unloaded Macaroni Grill, Corner Bakery, and On The Border in recent years, freeing it to focus on Chili's.
The casual dining industry in general has been struggling as customers either trade up to fine dining or opt for the quick service and convenience of fast casual. This doesn't leave a lot of room for winners in the casual dining segment, but Brinker has come through in a big way. Normalized earnings per share has come through with four consecutive years of double-digit growth, according to S&P Capital IQ data. Some of that performance has been juiced as a result of aggressive buybacks, but the important thing is that bottom-line growth has been resilient in the past, and it should continue to hold up in the future.
Analysts see earnings per share growing from $2.71 in fiscal 2014 to $3.10 this year, and $3.60 come fiscal $3.60. With Brinker posting positive comps and raising the bar as an early adopter of efficiency-improving tablets, it's showing casual dining chains the way things should be done.
2. McDonald's (MCD 0.65%)
The world's largest burger chain is also the most valuable publicly traded eatery based on market cap. It's easy to hate on Mickey D's these days. Comps are negative. The brand is tarnished. However, the same things that have held McDonald's back in recent quarters may also be setting the stage for a turnaround in 2015.
There are a few reasons to get excited about the Big Mac daddy's chances, here. An improving economy and low gas prices translate into more hungry commuters driving to and from work. McDonald's also has a beefy yield of 3.5%, and it should improve later this year since it has managed to increase its dividend every year since initiating a payout policy in 1976.
3. Chipotle Mexican Grill (CMG 0.62%)
The market darling among restaurant stocks in recent years has been Chipotle. The burrito roller's stock has been nearly a 10-bagger over the past seven years. A growing cult of Chipotle fans is flocking to the chain's fast-moving assembly lines.
We're not tiring of Chipotle, and despite healthy expansion -- it opened 192 new locations last year, with plans to tack on another 190 to 205 this year -- comps have been flying through the roof. Business began accelerating in early 2013, and even a menu price hike during the second quarter of last year didn't slow things down:
We're closing in on 1,800 locations, and there's plenty of real estate left to conquer. Chipotle is also gradually building out an Asian and pizzeria concept, giving it more ammo if the cult for its namesake concept ever decides to start lining up elsewhere.