Five Delicious Restaurant Stocks

Good News

Chain Restaurants

Five Great Restaurant Stocks

Surprising good news was released last week.

The numbers of people living in extreme poverty–subsisting on less than $1.25 per day–fell in every developing region of the world in recent years.

As a result, the world met the United Nation’s Millennium Development Goals to cut poverty in half five years before its 2015 deadline.

At the same time, the world met its Millennium Development Goal of halving the proportion of people without access to drinking water … again five years before its 2015 deadline.

The greatest gains were achieved in China, but smaller gains were broadly distributed, from Brazil to sub-Sahara Africa to India.

And what’s interesting about this achievement is that economists didn’t see it coming! They were convinced the global recession (in developed countries) would spill over into developing countries.

Instead, the opposite happened. Money fled the untrusted financial institutions of the developed world and found safe havens in commodities like copper, oil, gold and fertilizer–and well as plain old food–and as a result, the developing nations continued to make great progress.

(I also give some credit to Bill Gates and the billions of dollars his foundation has steered toward the developing world’s biggest problems.)

So what comes next? Ideally, more of the same because the more people who escape poverty, and the more who can become educated and productive, the better it will be for the world. In any case, what is clear is you’ve got to take the predictions of economists with a grain of salt.

In that way, it’s a bit like the stock market or the weather; any number of experts can predict that something will happen, but that doesn’t mean it will!

But today’s true topic is not poverty, it’s not the global economy and it’s not the action of the broad market.

No, today’s topic is chain restaurants, where there are some great investment opportunities. Legendary investor Peter Lynch called restaurants a “cookie-cutter” business, because once a profitable formula is developed, growth is simply a matter of opening more stores! This century-old business model has already yielded many great success stories and I have no doubt there are many more to come.

Horn and Hardart opened its first automat in Philadelphia in 1902, later expanding to New York City.

White Castle opened its first restaurant in Wichita, Kansas, in 1916.

A&W Root Beer opened its first restaurant in Lodi, California, in 1922.

Howard Johnson’s first restaurant opened in Quincy, Massachusetts, in 1925.

McDonald’s original restaurant opened in Monrovia, California, in 1940, laying the foundation for the global juggernaut we know today.

You can still invest in McDonald’s today. If your goal is modest growth with low risk, you can do a lot worse.

But I have an appetite for faster growth, and I don’t mind a little more risk, so I took a look at all 53 public companies in the restaurant business, from Krispy Kreme (KKD) to Cheesecake Factory (CAKE), from Domino’s Pizza (DPZ) to Starbucks (SBUX).

I combed through all 53 quite carefully, looking particularly closely at revenue growth, earnings growth and the chart action, and I narrowed the group down to the following five, all of which look like great growth investments today.

Buffalo Wild Wings (BWLD) has more than 800 restaurants in the U.S. and Canada serving wings and beer and showing sports on lots of TVs. Alcoholic beverages account for 23% of revenue. Revenue grew 28% last year to $784 million, while earnings grew 30% to $2.73 per share.

Buffalo Chart

The BWLD chart shows the high-volume buying surge that followed the release of fourth quarter earnings, followed by a one-month consolidation phase and then a quiet move out to all-time highs last week.

For more on the stock, I suggest the wisdom of Mike Cintolo, who has the stock in the portfolio of Cabot Market Letter.

Chipotle Mexican Grill (CMG) has more than 1,000 restaurants in the U.S., Canada and the U.K., serving tacos and burritos. It doesn’t serve alcohol, but it does serve “Food with Integrity,” making it the largest restaurant buyer of naturally raised meat in the country. Revenues grew 24% last year to $2.27 billion, and earnings grew 21% to $1.81 per share.

Chipotle Chart

The CMG chart shows a long and narrowing basing action late last year that gave birth to a renewed uptrend at the start of this year. The persistence of this move has been impressive.

Domino’s Pizza (DPZ) has more than 9,000 restaurants in 66 countries. What’s interesting about the company is that 56% of revenues come from its “domestic supply chain,” while 22% come from domestic company-owned stores, 11% from domestic franchises and 11% from international. Revenues grew 5% last year to $1.65 billion, while earnings grew 25% to $1.69 per share.

Domino Chart

As to the DPZ chart, after trending upward from 2009 through 2011, the stock paused from November through February to build a base in the low 30s, and the uptrend resumed after the fourth quarter earnings release sparked new buying on huge volume.

For more on DPZ, see today’s issue of Cabot Top Ten Trader.

Starbucks (SBUX) operates more than 17,000 coffee shops in 55 countries, and continues to innovate; last week the company announced that in the fall it will begin selling a new single-cup machine for home use that will make both brewed coffee and espresso. Last year revenue grew 9% to $11.7 billion and earnings grew 19% to $1.52 per share. Starbucks pays a dividend, yielding 1.4% per year.

Starbucks Chart

The SBUX chart has been trending steadily higher for years, and last week’s news of a new single-cup coffee brewer–coming after a one-month period of treading water at 48–led to a big-volume rush of new buying.

Yum! Brands (YUM) is the parent of Pizza Hut, KFC and Taco Bell, with more than 37,000 stores in 28 countries, both company-owned and franchised. The greatest growth region is China, where same-store sales grew 19% last year and the company opened 656 new restaurants. Globally, revenues grew 11% to $12.6 billion, while earnings grew 13% to $2.87 per share. The company pays a dividend, currently yielding 1.7%.

YUM Chart

The YUM chart features a steady but moderate uptrend. YUM isn’t particularly exciting, but it is growing faster than the market!

Note: These stocks are in alphabetical order … but by coincidence, they’re also in order of risk! Aggressive investors should consider Buffalo Wild Wings; as the smallest company here, it can grow the fastest. Risk-averse investors should consider Yum! Brands, which is the largest and highest-yielding.

But everyone should consider some restaurant stocks.  The whole sector is benefiting from the global economic recovery … and people need to eat!

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher
Cabot Wealth Advisory

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