Five Best Fast Food Chain Stocks to Buy Now

The Quick Service Restaurants (QSR) industry, or the so-called fast food industry, has seen immense growth over the past few decades (i.e. the revenues have grown at an annualized rate of more than 8% since 1970). The U.S. fast food restaurants have franchises in more than 100 countries all around the world, while the number of U.S. fast food establishments has expanded to over 230,000. It is also worth pointing out that emerging markets represent a land of opportunities for fast food chains, as these markets are the fastest growing sectors within this industry. However, the altering perceptions about health and eating habits have been challenging this industry quite seriously over the past few years, but most fast food companies have simultaneously started to make steps towards tackling these challenges. Specifically, the fast food industry has been constantly implementing new product offerings and promoting new practices in an attempt to satisfy their customers. That being said, the Insider Monkey team will lay out a list of five popular fast food chain stocks among the hedge fund industry. This list is constructed based on hedge fund sentiment, which we believe represents a powerful tool of identifying attractive and high-return stocks.

Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. However, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull environment. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk-adjusted returns. For instance, the 15 most popular small-cap stocks among them outperformed the S&P 500 Index by an average of 95 basis points per month in our backtests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012 and these 15 stocks have managed to return more than 118% and outperformed the S&P 500 Index by 60 percentage points (see the details here).

5. Chipotle Mexican Grill Inc. (NYSE:CMG)

Investors with Long Positions (as of June 30): 36

Aggregate Value of Investors’ Holdings (as of June 30): $884.43 Million

Although there was one less hedge fund with a stake in Chipotle Mexican Grill Inc. (NYSE:CMG) at the end of the second quarter relative to the previous one, the stock still made our list of most popular fast food chain stocks. At the same time, the hedge funds tracked by Insider Monkey invested in the stock collectively own 4.70% of the company’s outstanding shares. The value of their investments shrank by $263.96 million over the quarter, partly owning to the disappointing stock performance during the quarter. However, the stock has skyrocketed since the beginning of July, so these investments are now worth a lot more than at the end of June. Chipotle, which received the second best customer-satisfaction rating in the QSR industry, has seen its shares advancing by 6% year-to-date. Jim Simons’ Renaissance Technologies piled up more shares of Chipotle Mexican Grill Inc. (NYSE:CMG) during the June quarter and boosted its stake to 313,500 shares.

4. Restaurant Brands International Inc. (NYSE:QSR)

Investors with Long Positions (as of June 30): 37

Aggregate Value of Investors’ Holdings (as of June 30): $2.54 Billion

The hedge funds observed by us amassed nearly one third (i.e. 32.80%) of Restaurant Brands International Inc. (NYSE:QSR)’s shares at the end of June. Even though the number of top money managers reporting stakes in the stock increased by six quarter-over-quarter, the value of these stakes remained somewhat the same (i.e. increased by $1.5 million). Earlier this month, Rospotrebnadzor, the consumer protection regulator in the Russian Federation, announced that it had identified food-safety violations at two Burger King locations. However, the talks around these violations have already been consumed without affecting the company’s stock performance. Let’s not forget to mention that the stock has lost some ground this year, declining slightly by over 4% year-to-date. Bill Ackman’s Pershing Square is by far the largest equity holder of Restaurant Brands International Inc. (NYSE:QSR) within our database, owning 38.00 million shares.

3. Wendys Co (NASDAQ:WEN)

Investors with Long Positions (as of June 30): 38

Aggregate Value of Investors’ Holdings (as of June 30): $1.30 Billion

Wendys Co (NASDAQ:WEN) became very popular among the hedge funds monitored by Insider Monkey during the June quarter, as the number of investors increased by 20 quarter-over-quarter. The stakes owned by these funds accounted for 31.60% of the company’s outstanding common stock on June 30. The value of the overall stakes increased as well during the three-month period, growing by slightly more than $120 million. Even though the shares of Wendys have embarked on a steady downtrend since late-June, they are still in the green year-to-date. Wendys intends to reduce company-owned stores to 5% by mid-2016 through its re-franchising campaign, which could drive up its financial results in the years ahead. Jason Karp’s Tourbillon Capital Partners acquired a 4.20 million-share stake in Wendys Co (NASDAQ:WEN) during the second quarter.

2. Yum! Brands Inc. (NYSE:YUM)

Investors with Long Positions (as of June 30): 59

Aggregate Value of Investors’ Holdings (as of June 30): $4.06 Billion

Yum! Brands Inc. (NYSE:YUM) also lured some hedge funds during the second quarter, as nine more money managers disclosed the stock in their 13F filings for the June quarter. Their stakes accounted for 10.40% of the company’s shares at the end of June, while the aggregate value of holdings more than doubled during the three-month period (it increased by $2.57 billion). The stock has outperformed the broader market so far this year, delivering a return of nearly 8% year-to-date. Daniel Loeb’s Third Point, the second-largest shareholder of Yum! Brands Inc. (NYSE:YUM) within our database with 3.58 million shares, believes that the quick service restaurant company has been successfully getting over the recent troubles in its Chinese business (read more details here).

1. McDonald’s Corporation (NYSE:MCD)

Investors with Long Positions (as of June 30): 81

Aggregate Value of Investors’ Holdings (as of June 30): $6.28 Billion

Even though McDonald’s Corporation (NYSE:MCD) exhausted some of its charm among the smart money during the June quarter, the stock managed to retain the top spot in the most favorite fast food chain stocks list. The number of hedge fund investors with positions in McDonald’s decreased to 81 from 89 during the second quarter, while the value of these positions shrank to $6.28 billion from $6.83 billion. It is also worth mentioning that the hedge funds tracked by Insider Monkey collectively own 6.90% of the company’s shares as of June 30. The recently-appointed CEO of McDonald’s, Steve Easterbrook, has been working on figuring out what stands behind the restaurant’s weakening sales (for example, its global comparable sales decreased by 0.7% during the second quarter) and on making some moves towards revitalizing the demand for its products, so one may expect positive sales growth in the upcoming quarters. Mason Hawkins’ Southeastern Asset Management reported owning 9.87 million shares of McDonald’s Corporation (NYSE:MCD) in its latest 13F filing.

Disclosure: None