For the last half-century, McDonald’s (MCD) has been the gold standard in restaurant stocks. But the fast-food king’s biggest period of growth is long in the rearview mirror, and the stock is now more a reliable dividend payer than a long-term growth story. In the last five years, MCD shares are up 72%, slightly less than the 75% run-up in the S&P 500 over the same span.
Better growth can be found elsewhere in the fast food industry. But with wide disparities in performance, you can’t just buy any fast food stock that’s in an early growth stage. Jack in the Box (JACK) and Zoe’s Kitchen (ZOES), for example, are down 13% and 45%, respectively, this year. Others, like Yum! Brands (YUM), are growing at a more modest (+2% this year), McDonald’s-like pace.
Here are three restaurant stocks that have outpaced the rest for the better part of a year—and look well positioned to continue growing for the foreseeable future:
Restaurant Stock #1: Domino’s Pizza (DPZ)
Domino’s is almost as old as McDonald’s, but Millennials have given this well-known pizza delivery joint a fresh coat of paint. America’s largest generation (having supplanted Baby Boomers), comprised of 20- and 30-somethings, likes everything fast, including their food. Thus, Domino’s vow to deliver your pizza within 30 minutes or it’s free is music to their impatient ears.
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And Millennials have undoubtedly had a profound impact on Domino’s business: the company’s sales growth has swelled in each of the last five years, going from 1.6% growth in 2012 to 12.8% last year. Sales spiked 25% in the first quarter, with earnings jumping 42%. Analysts anticipate 24% sales growth this year, with 40% EPS growth.
As a result, DPZ stock keeps climbing to all-time highs, more than doubling in the last two years, with a 44% jump already this year. The chart tells you all you need to know about DPZ’s momentum.
Restaurant Stock #2: Wendy’s (WEN)
While not as old as McDonald’s, Wendy’s—like Domino’s—is no spring chicken, founded in 1969 by Dave Thomas. Unlike MCD stock, however, WEN got crushed during the recession, as sales fell from double-digit growth to no growth.
Well, Wendy’s still isn’t growing sales—it hasn’t done so since 2012. But profits are, by more than 60% last year and by double digits (or more) in each of the last five years. Compared to McDonald’s more uneven profit growth, Wendy’s looks like the more appetizing old-school burger joint to investors. And since bottoming below $6 a share in 2013, the stock has exactly tripled to just under $18.
For most of 2018, WEN had barely budged, but an earnings beat in the first quarter prompted a 10% gap up in the restaurant stock earlier this month.
On dips, that looks like a pretty good buying opportunity on strong momentum.
Restaurant Stock #3: ?????
My third restaurant stock selection actually is not my own—and thus not mine to give away!
It’s a recent selection of our Mike Cintolo, who recommended the stock in the May issue of his Cabot Growth Investor advisory newsletter. Here’s what Mike wrote about it then:
“[Name redacted] bills itself as a modern roadside burger joint, with premium burgers, dogs, fries and shakes. Customer loyalty seems very high (it’s got a bit of a cult-like feel to it, in a good way), but competition and higher costs (food and labor, but also store opening expenses) have crimped earnings, which kept the stock under wraps following a post-IPO plunge in 2015.
“However, the potential here remains huge—revenue growth has remained excellent for many quarters, and while same-store sales have lagged, they’re starting to perk up (up 1.7% in Q1).
“Most of all, [name redacted] has a very aggressive and impressive expansion plan—the firm had 159 restaurants in operation at the end of last year, but anticipates 50 new ones this year alone! And management believes it can have 200 company-operated restaurants by 2020 (up from 90 today; the rest are licensed)!
“Because of that, analysts see revenues up between 25% and 30% during the next couple of years, with earnings growth finally kicking into gear in 2019. But that might be too conservative—Q1 earnings easily topped expectations and lifted 44%, causing the stock to go bananas, ripping to multi-year highs on 8 times average volume.
“We’re very intrigued by [name redacted’s] growth potential and the stock’s action.”
To learn the name of this mystery restaurant stock, which is already up 10% in the month since Mike recommended it, click here.
In the meantime, keep restaurant stocks on your radar. They’re not all winners, but with the U.S. retail environment improving and America’s obesity epidemic not slowing (depressingly enough), there are some companies in the fast-food industry worth gobbling up—especially now that the worst of the market correction appears to be behind us.
Investment analyst and Chief Analyst of Cabot Wealth Daily, Chris Preston brings you all the latest from the investing world. Sign up to get updates and breaking news delivered FREE to your inbox. Get unlimited access to our library of complimentary investing reports.Sign up now!