Restaurants are one of the few industries where an economic recovery is in full swing. The industry actually employs more workers than it did before the recession, over a time period when the U.S. as a whole has lost millions of jobs. The National Restaurant Association expects that industry revenues will be up 3.5% this year. If you are planning to invest in this industry, a good place to look for candidates is the list of stocks that are favored by hedge funds. According to Insider Monkey’s database of 13F filings, here are the 10 most popular restaurant stocks among hedge funds:
1. Yum Brands (NYSE:YUM): The second highest market cap restaurant stock was the top pick among hedge funds. Yum’s trifecta of quick service restaurant brands consists of KFC, Taco Bell, and Pizza Hut and the company operates a total of over 37,000 restaurants around the world, including a strong position in China. Columbus Circle Investors initiated a 1.6 million share position in the first quarter of 2012 (see some of Columbus Circle's other stock picks). Up 10% this year, the stock trades at a trailing P/E of 20.
2. McDonalds (NYSE:MCD): 37 hedge funds had a position in the $93 billion market leader McDonalds, unchanged from the beginning of the year. Among these was Jim Simons’s Renaissance Technologies, which had MCD as its largest 13F holding (see the rest of Simons's portfolio). McDonalds now trades at 17 times its trailing earnings. At current prices the company offers a 3.1% dividend yield, making it a potential income stock. It also has a remarkably low beta for a large consumer company, at 0.24, so investors should be better protected from poor economic conditions than they would be in other investments. The stock recently experienced a small decline because of the negative effects of a strengthening US dollar on its results. We think US dollar will depreciate significantly against emerging market currencies where MCD has a strong presence. This is one of the reasons why we are long-term bullish about this stock.
3. Dunkin Brands (NASDAQ:DNKN): Dunkin Brands is expensive at a trailing P/E of 73, but 24 hedge funds had positions in the stock at the end of March, up from 16 at the end of December. In the last three months the stock has risen 9% as investors hope that its growth strategy will be successful. Analyst expectations yield a forward P/E of 24, more in line with other restaurant stocks. The company consists of Dunkin Donuts restaurants (which focus on donuts, bagels, and coffee) and ice cream seller Baskin-Robbins. Coatue Management, founded by Tiger Cub Philippe Laffont, initiated a 3.9 million share position in DNKN in the first quarter (see other stock picks from Laffont).
4. Domino’s Pizza (NYSE:DPZ): With a mere $1.9 billion market cap, DPZ was the fourth most popular restaurant stock among hedge funds with 23 funds having it in their 13F portfolios. The stock is flat this year; revenue and earnings decreased in the last quarter compared to the same quarter in 2011, but analysts expect strong growth over the next year. Scout Capital- cofounded by a former analyst at billionaire Dan Loeb’s Third Point- owned 5.4 million shares, having doubled their holdings of the company in early 2011 (research more of Scout Capital's favorite stocks).
5. Chipotle Mexican Grill (NYSE:CMG): The rapidly growing burrito chain (revenue rose 26% in the first quarter compared to a year ago, and earnings rose 35% as margins expanded) was the fifth most popular restaurant stock, though the number of hedge funds with a position fell to 21 from 27. The stock is up 16% so far this year. The company will have to continue its growth to support its stock price, as its trailing P/E is 55. Two Sigma Advisors had a very small position in the company at the end of 2011, but raised its stake to over 150,000 shares and $65 million by the end of March (see Two Sigma's other holdings).
6. Cheesecake Factory (NASDAQ:CAKE): 19 hedge funds had positions in CAKE, which is up 10% so far in 2012 and carries a trailing P/E of 19. The company is expected to grow its earnings this year to the point that its forward P/E falls to 15. Tremblant Capital owned 2.4 million shares of Cheesecake Factory; the fund has been selling off some shares ever since doubling its position in summer 2011 (see more stocks owned by Tremblant Capital). CAKE is rare among top hedge fund holdings in that it is a sit-down restaurant; hedge funds seem to be generally buying into higher growth in quick service chains.
7. Wendy’s (WEN): Wendy’s trades at the highest P/E of hedge funds’ most popular restaurant stocks, at 90. The $1.9 billion quick service restaurant company has over 6,000 locations to its name in the U.S., of which over 5,000 are franchises. Nelson Peltz’s Trian Partners, an activist hedge fund, owned 83 million shares of WEN at the end of March and has been a major Wendy’s investor since summer 2011 (find more stock picks from Nelson Peltz). Wendy’s is losing its luster among hedge funds, however; the 26 funds which had owned the stock at the end of December had dropped to 17 three months later.
8. Buffalo Wild Wings (BWLD): Buffalo Wild Wings is another restaurant which is trying to play out a growth thesis. Its revenue and earnings grew 38% and 23% in the last quarter, respectively, compared to the same quarter in the previous year. Its trailing P/E of 29 means that it is priced to continue this growth. 16 hedge funds owned shares of BWLD in their 13F portfolios, among them John Murphy’s Alydar Capital which launched a 230,000 share position. So far this year the stock is up 30% after popping in February.
9. Darden Restaurants (DRI): Darden, which owns a number of restaurants including Red Lobster, Olive Garden, LongHorn Steakhouse, and the upper-scale Capital Grille, has been in the news recently after buying Yard House (read more about Darden's acquisition of Yard House). As a portfolio of sit-down restaurants Darden is largely out of favor in the market: its forward price-to-earnings ratio is less than 12, as analysts expect it to substantially grow earnings over the next year. Darden also pays a 4% dividend yield.
10. P.F. Chang’s (PFCB): P.F. Chang’s has since been acquired by private equity group Centerbridge Partners in a $1.1 billion deal, stinging the few hedge funds who exited their investments in the first quarter of 2012 (the 18 funds with positions at the beginning of the year had fallen to 15). One of the big winners from the acquisition was Citadel, which had owned 800,000 shares at the end of March (see Ken Griffin's other stock picks).