The biggest challenge for the restaurant industry right now is the novel coronavirus pandemic. And that has been an interesting situation for restaurant stocks.
It limits indoor seating in most states, and not being able to fill the seats really hurts over time. And new research shows that restaurants remain one of the most significant threats to catching the virus.
In turn, this has certainly hurt local restaurants, who had to change their business models to takeout or set up delivery models to try and make ends meet. However, larger chains that moved quickly or had built-in demographic advantages have begun to emerge as big winners.
That said, these six restaurant stocks to fill up on cast the widest net as far as their customer base goes. They are all relatively low-priced chains that have a strong following. They also had built-in models for on-the-go consumers that were in place before the pandemic. And now, they have simply upped their germ-fighting protocols.
What’s more, these companies provide comfort food, and comfort is in high demand right now. Thus, these six names are great options for investors.
- El Pollo Loco (NASDAQ:LOCO)
- Papa John’s (NASDAQ:PZZA)
- Wingstop (NASDAQ:WING)
- YUM China Holdings (NASDAQ:YUMC)
- Chipotle Mexican Grill (NYSE:CMG)
- Biglari Holdings (NYSE:BH)
So, with all of that in mind, let’s dive in!
Restaurant Stocks to Fill Up On: El Pollo Loco (LOCO)
This Mexican-style rotisserie chicken chain started in Los Angeles in 1975, and now has 475 total franchised restaurants.
It is in what the food service industry the QSR sector, or quick-service restaurants. That means its customers use the drive thru or order at a counter to get their food. That means, no one has to use the actual seating for the restaurant to generate necessary revenue volume.
This is the key to many of the restaurants here. They are all following a QSR model, and have been before the pandemic hit. And since they focus on value-based menus, they are still attracting customers now that spending on food has become more inelastic.
While the company is only up 2% year-to-date, it’s up 34% in the past 12 months, which shows that demand has been and remains strong. It has a $554 million market capitalization, so it’s going to get caught in some of the wake of the broader industry. However, it’s a strong player and still decently priced given its growth.
Papa John’s (PZZA)
Headquartered in Louisville, Kentucky, Papa John’s is one of the biggest pizza franchises in the world and growing like kudzu. Today, it has around 5,347 stores in 48 countries.
The company has followed the model of its close rival Dominos (NYSE:DPZ) in the way it has vertically integrated the entire franchise model. It has divisions that make the dough that supply the restaurants, and companies that supply the boxes and other materials that make the delivery and pick-up pizza firm hum.
A couple years ago, the company hit some tough times when the founder began making controversial statements that turned a significant amount of public sentiment against the franchise. In fact, it lost its NFL sponsorship deal and one of its key celebrity promoters — Peyton Manning — sold his 31 franchises and walked away.
The stock dropped to multi-year lows last year, but has recovered quickly. This is partially due to the board forcing the founder out, signing a deal with NBA star Shaquille O’Neal and spending a lot of time working with franchisees.
Overall, the stock is up 28% YTD and 56% in the past year. It’s back on track, but don’t chase it too high, its recovery has it trading at a significant premium.
Restaurant Stocks to Fill Up On: Wingstop (WING)
It should be no surprise that this QSR that started in Garland, Texas specializes in wings. What is surprising, though, is the enormous growth it has seen since its beginning in 1994. In fact, it has more than 1,400 locations across the world.
Currently, its market cap is quickly nearing $4 billion, and the stock is up more than 54% YTD. It is gainng attention now, because it has kept operations simple: wings with a variety of unique sauces. It offers wings, chicken tenders, a handful of sides and a dessert.
In turn, that makes it easy for customers looking for quick food. And, with the NFL starting and the NBA playoffs underway, while people might not be having a lot of guests over for games, they can still enjoy the classic sports food.
Collectively, WING stock is trading at a premium. But as long as its growth continues at its current pace, it shouldn’t be an issue.
Yum China Holdings (YUMC)
The railway station in Shanghai, China has been one of KFC’s busiest locations for almost a decade now. And there are 70% more KFC franchises in Asia as there are in the U.S. So, China has more KFCs than the US.
Yum China is a spinoff of the parent Yum! Brands (NYSE:YUM), and includes the much beloved QSRs KFC, Taco Bell, Pizza Hut, as well as regional restaurants.
Nonetheless, it’s really about the chicken.
And if you look at the stock chart, even during the COVID-19 lockdown, YUMC stock price stayed relatively stable. There wasn’t crash and recovery; it was a plateau and now a rise. That is testament to the durability of YUMC brands during a massive crisis like the pandemic.
Now that the worst is over for China and the rest of Asia, it’s back to growth again. Remember, China is four months or so ahead of the U.S. in the pandemic recovery. And even if things get worse this fall or winter, it likely won’t boost the stock too much.
Overall, YUMC stock is trading at a price-earnings ratio (P/E) around 30. But given its resilience in hard times, that a decent premium for security.
Restaurant Stocks to Fill Up On: Chipotle Mexican Grill (CMG)
Ah, remember the good old days when Chipotle’s biggest issues were clean supply chains for their lettuce? Certainly, those days are in the rearview mirror, at least for now.
Ironically, its focus on a clean supply chain has actually paid off for CMG stock in the age of COVID-19. Its focus on keeping it clean from supplier to customer means it wasn’t a big lift for the company to put measures in place during the pandemic.
And CMG was also already app-based order processing, which is virtually touchless for the customer since everything is done online and you just walk in and grab your order. It also doesn’t charge a delivery fee on orders over $15 using the bigger delivery services.
Plus, it has a very dedicated following by having hit the perfect point between quality products and accessible price points. In turn, it’s premium food at a value price.
The stock is up over 43% YTD and it has a triple-digit P/E — which, for a company with a $35 billion market cap is pretty rich. However, as a long-term growth stock, it’s pretty tasty.
Biglari Holdings (BH)
This is an odd duck to be sure. The holding company owns Steak n’ Shake, as well as Western Sizzlin’ franchises. Nothing too odd about that, right?
However, its other divisions are what make this a unique collection of businesses.
It has an insurance division that offers commercial truck insurance. And it has an offshore oil and gas business in the Gulf of Mexico.
Oh, and it also owns Maxim magazine.
While all this sounds a bit odd, the fact is all these businesses have one thing in common: the owner, Sardar Biglari. He is a serial entrepreneur and turnaround artist, and all these companies were on death’s door when Biglari found them and turned them around.
It is certainly an eclectic mix. BH.A has a market cap slightly below $300 million, doesn’t trade a great deal and it has a very low beta — meaning it’s not as volatile as the market. In turn, this may be more of a bet on the founder than the sectors the company is in, but it is scoring well on my criteria.