These Are Hedge Funds’ 10 Favorite Restaurant Stocks

The 13Fs for the third quarter of 2012 are in and we can not only comb through our database and determine the most popular stocks among hedge funds but also look at different industries or sectors and see which names are hot among the “smart money” there. The restaurant industry has been one of the bright spots in the weak U.S. recovery, with employment and sales rising nicely in the last few years. Here are the ten most popular restaurant stocks among the hedge funds and other notable investors in our database of 13F filings as of the end of September:

Ken Fisher - FISHER ASSET MANAGEMENT

The most popular restaurant stock was market leader McDonald’s Corporation (NYSE:MCD), with 44 hedge funds reporting a position (up from 36 last quarter). Billionaire Ken Fisher’s Fisher Asset Management added shares during the third quarter, and closed September with 5.7 million shares in its portfolio (check out more of billionaire Ken Fisher's stock picks). McDonalds’ business was narrowly down last quarter versus a year earlier but the stock trades at only 16 times trailing earnings with a good dividend yield.

Starbucks Corporation (NASDAQ:SBUX) was another popular pick as 36 funds owned shares in the coffee shop. Revenue was up 11% last quarter versus a year earlier, but the company failed to convert that better top line into much of a change in net income. We don’t like that it trades at 28 times trailing earnings- that seems high for a stock that isn’t seeing much growth.

Hedge funds continued to pull out of Yum! Brands, Inc. (NYSE:YUM) for the second straight quarter, possibly worried about the company’s exposure to China. There’s nothing wrong with Yum’s numbers yet- revenue and earnings are still up- but its earnings multiples are in the 20-22 range and we can understand why investors were worried about the risk as markets generally price in a weaker Chinese economy.

28 filers in our database reported owning Dunkin Brands Group Inc (NASDAQ:DNKN), up from 19 three months earlier. Dunkin trades at 70 times trailing earnings, and even with generous growth expectations its forward P/E is 21. It has been getting good earnings growth recently but we still think that we’d avoid it.

Chipotle Mexican Grill, Inc. (NYSE:CMG) remained one of the most popular restaurant stocks even though hedge funds backed out of the fast-growing quick service Mexican restaurant. Billionaire David Einhorn of Greenlight Capital recommended shorting the stock in early October (see why Einhorn didn't like the stock) and Chipotle has dropped 17% this quarter.

19 funds owned shares of Domino’s Pizza, Inc. (NYSE:DPZ). Domino’s grew its net income by 18% in the third quarter compared to the same period in 2011 off of little change in revenue, though at a trailing P/E of 23 it will have to continue significant growth to justify its valuation.

Ownership of Krispy Kreme Doughnuts (NYSE:KKD) ticked up slightly as Dunkin wasn’t the only doughnut shop that hedge funds liked. Its market cap is only about $600 million (with plenty of volume), so it’s interesting to see it be so popular. It looks considerably cheaper on a forward earnings basis than its larger peer.

While Starbucks had been a quite popular stock, its closest peer Panera Bread Co (NASDAQ:PNRA) saw decreased hedge fund interest. Panera trades at 29 times trailing earnings, but has been growing its revenue and earnings at double-digit rates and expectations of continued growth place its forward P/E multiple at a more reasonable 23.

Buffalo Wild Wings (NASDAQ:BWLD) broke into our list of the top restaurant stocks as 15 funds reported a position. In the third quarter, Buffalo Wild Wings experienced high earnings growth but earnings actually declined. There’s also quite a bit of short interest in the stock.

Rounding our hedge funds’ ten favorite restaurant stocks was the only table-service restaurant on the list: Brinker International, Inc. (NYSE:EAT), which owns the Chili’s and Maggiano’s Little Italy brands. Brinker’s trailing P/E multiple of 15 is lower than that of most of these other restaurants, as quick service restaurants are expected to see faster growth.

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