4 Restaurant Stocks on the Rebound

Stocks on the Rise

Few industries have been hit harder by COVID-19 than restaurants. But a select few have stayed mostly open, and shares of those restaurant stocks are soaring.

One of America’s favorite leisure activities suffered a serious blow during the pandemic as restaurants across the country were forced to close their doors. And while many dining establishments are finally opening up again, the restaurant landscape has been significantly altered by new rules designed to contain the virus. Consequently, many experts see major detriments to profitability across the industry landscape, but not all restaurants are expected to underperform. So today, we’ll take a look at some of the more promising (and pandemic-proof) restaurant stocks.

To say that 2020 has been a tough year for the restaurant industry would be a huge understatement. According to FactSet data, the consumer discretionary sector—which includes restaurants—is expected to report the second-biggest earnings decline (-113%) of all 11 sectors in Q2. The hotel, restaurant and leisure segment of this group is expected to be particularly hard hit, with FactSet predicting a 174% earnings decline in the current quarter, compared to a year ago. However, the grim numbers don’t tell the complete story, as green shoots are starting to emerge.

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Of the small retailers and restaurants that were closed in mid-April, nearly 80% of them have since reopened, according to the scheduling tool Homebase. Strict social distancing guidelines will act as a drag for many eateries in the months ahead, though, and will likely limit their profits. Many restaurants across the country are also following the “Tennessee Pledge,” which recommends that the bar area (a major revenue source for some restaurants) remain closed. It further recommends distancing tables at least six feet apart and reducing the seating capacity of dining areas.

But despite these obstacles, more than a few restaurants have managed to maintain profitability by doubling down on their take-out services or by increasing (and introducing) outdoor seating capacity. At this stage in the recovery, it’s clear that the food providers that already had a strong take-out and delivery business will continue to be among the top performers. And it’s this category of restaurants that investors should pay the most attention to going forward. Let’s take a look at some of them.

4 Restaurant Stocks to Consider

Restaurant Stock #1: Wendy’s (WEN)

Fast-food restaurants were among the industry’s top performers since most of them remained open for drive-through and delivery business during the shutdowns. Wendy’s (WEN) continues to be a leader in this category, having almost tripled from its March crash low. While most restaurants closed down completely in the early stage of the pandemic, Wendy’s reported that 96% of its global stores and 99% of its 5,865 U.S. restaurants remained open through the early days of the pandemic. Some Wendy’s operators reportedly even managed to increase before-tax earnings during April’s shutdowns even with lower sales—a testament to the firm’s strong drive-up business.

What’s more, global system-wide sales grew 1% for Wendy’s in the first quarter (compared to 3.3% a year ago), with comparable-store sales down just 0.2% (versus a 1.4% gain in 2019). This was an impressive pandemic performance compared to most restaurants, including fast-food juggernaut McDonald’s (MCD). Management is being extremely cautious in terms of opening up its dining rooms, but the stock doesn’t seem to mind and isn’t very far from an all-time high as of this writing. While a consolidation or further pullback is possible in the near term, WEN should be able to continue its well-established long-term upward trend once it finally reopens its doors to sit-down customers.

Wendy's (WEN) is one of several restaurant stocks on a rebound.

Restaurant Stock #2: Chipotle Mexican Grill (CMG)

Chipotle Mexican Grill (CMG) has been one of the biggest restaurant success stories in the wake of the coronavirus shutdowns. Although COVID forced 100 of its restaurants to temporarily close while increasing restructuring costs, the company rebounded thanks to a big increase in digital sales during the lockdowns. Chipotle has, in fact, focused much of its efforts in the past year on digital sales and delivery services—a move which paid off when its dining rooms were shut. Analysts see revenue growing 1% in 2020, then taking off again in fiscal 2021 with an anticipated 15% top-line increase.

The company further boasts a strong balance sheet with no debt and more than $900 million in cash on hand, which should help facilitate its return to normal in the months ahead. Its enviable drive-through business during the pandemic helped push its stock price to an all-time high, as you can see here. As the reopening phase of the U.S. economy continues, CMG should be able to benefit by extending its bull market. I view weakness in the stock as a nibbling opportunity, backed by a loose stop-loss.

Restaurant Stock #3: Domino’s Pizza (DPZ)

To no one’s surprise, pizza deliveries skyrocketed during the lockdowns as Americans craved their favorite fast food from the comfort of their homes. Domino’s Pizza (DPZ) was made to order for times like this, which is reflected in the all-time highs the stock price recently hit. Domino’s U.S. same-store sales grew 7% during the first month of its second quarter and hired 10,000 workers to meet increased delivery demand during the pandemic.

Domino’s also boasts $200 million in cash on hand and has been a steady payer, raising the dividend to $0.78 earlier this year. While it’s not the bargain it was in March, its revenue and earnings growth trends were well established long before the virus hit, and analysts predict 10% revenue growth this year along with 21% per-share earnings growth. The firm’s focus on technological innovation—which makes ordering quick and easy—should also keep its customers returning in the post-shutdown economy. The stock looks vulnerable to near-term profit-taking after its recent run, but I expect the long-term bull market to continue.

Restaurant Stock #4: Wingstop (WING)

Wingstop (WING) offers an assortment of flavored chicken wings, along with other foods, in a typically small, aviation-themed setting with more than 1,400 locations. But it has been the firm’s digital and delivery efforts that have allowed it to maintain growth in the post-COVID economy. As Mike Cintolo has pointed out in our Cabot Top Ten Trader advisory, the company’s management views Wingstop as being among the top 10 global restaurant brands, with 6,000 potential locations globally and more than 3,000 in the U.S. alone—an ambitious goal backed by an impressive sales growth trend.

Last month, the company came out with consensus-beating quarterly earnings of $0.27 per share, while top-line sales in Q1 increased 15%. Analysts don’t expect the growth to stop, either, with EPS in Q2 expected to rise 65% while revenue is forecast to grow 62%. It has been described as a “steady, cookie-cutter story” but it’s not one we’d care to bet against.

WING stock has pulled back in recent weeks but has recently found support above its 50-day line. It has spent nearly six weeks in a trading range but has remained “tight” during its consolidation and could be setting up another entry point. A move above the 128 level (the May closing high) would confirm that the next leg of its longer-term bull market has begun.

Wingstop (WING) is one of several restaurant stocks on the rebound.

The companies discussed here are among the top performers in the restaurant industry and should be able to benefit from any improvement in economic conditions in the coming months. Investors should further expect that restaurant stocks in a relative strength position during the pandemic will continue to outperform as this key industry gradually recovers ground lost during the shutdowns.

If you want the best-performing growth stocks right now, I highly recommend subscribing to our Cabot Top Ten Trader advisory, where every week chief analyst Mike Cintolo provides you with 10 of the market’s strongest growth stocks from both a technical and a fundamental perspective.

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Timothy Lutts

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