In this article we present the list of Top 10 Restaurant Stocks to Buy Now. Click to skip ahead and see the Top 5 Restaurant Stocks to Buy Now.
The restaurant industry has faced unprecedented challenges this year stemming from the Covid-19 pandemic, which has forced millions of locations worldwide to remain closed at various points since March and operating at reduced capacity when open.
The Invesco Dynamic Leisure & Entertainment ETF (NYSEARCA:PEJ), which is most heavily weighted towards the restaurant sector, is still down by 15% in 2020, though it has gained 28% since the end of October owing to the favorable developments on the coronavirus vaccine front.
Aside from the current challenges it faces, the restaurant industry is undoubtedly on the rise, as evidenced by the growing chunk of the food market that it’s been able to eat up in recent years. Restaurant spending toppled traditional grocery spending for the first time in 2010 in the U.S and the industry has continued to grow since then.
As devastating as the pandemic has been near-term, it has served to accelerate other positive industry trends like online food delivery, which was projected to be a $200 billion market by 2025 even before the pandemic hit. Asia has been one of the strongest growth markets for online food delivery, accounting for 55% of the global market in 2018, a large chunk of that coming from China.
While the industry is growing, it’s traditionally a low-margin sector that is fraught with peril for investors. As food delivery continues to supplant in-house dining going forward, restaurants will have the opportunity to reorganize their operations and potentially drive margin expansion through more efficient kitchen setups, smaller dining areas, and more aggressive product pricing. Loyalty rewards programs is another area in which several restaurant chains have made major investments in recent years.
In this article, we’ll run through the ten most promising restaurant stocks to invest in now based on the hedge fund sentiment in these stocks as of the latest 13F reporting period of September 30. Given the long-term focus that many hedge funds operate by and the vast resources they have when it comes to analyzing companies and market trends, paying attention to their consensus stock picks can be highly profitable.
Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 66 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
Some of the restaurant stocks that didn’t quite crack the top 10 included Wingstop Inc (NASDAQ:WING), which has gained a lot of hedge fund support in the past four years, Bloomin’ Brands Inc (NASDAQ:BLMN), The Wendy’s Company (NASDAQ:WEN), Shake Shack Inc (NYSE:SHAK), and Dunkin Brands Group Inc (NASDAQ:DNKN).
Now then, let’s check out the Top 10 Restaurant Stocks to Buy Now. Note that all hedge fund data is based on the exclusive group of 800+ funds tracked by Insider Monkey as part of our market-beating investment strategy.
10. Restaurant Brands International Inc. (NYSE:QSR)
Restaurant Brands International Inc. (NYSE:QSR) lands in tenth position, being owned by 33 hedge funds on September 30. There’s been a steep drop in hedge fund support over the past year for the fast food holding company which operates the Burger King, Popeye’s, and Tim Horton’s chains, as 59 hedge funds were long QSR on September 30, 2019.
One of the stock’s biggest remaining bulls is hedge fund icon Bill Ackman of Pershing Square, who owned 25.12 million QSR shares at the end of Q3. In the billionaire investor’s Q2 investor letter, he noted that QSR’s restaurants have made significant enhancements to their digital footprint and delivery capabilities, which he believes will make them stronger than ever post-pandemic.
9. Domino’s Pizza, Inc. (NYSE:DPZ)
Domino’s Pizza, Inc. (NYSE:DPZ) is another stock that has lost significant hedge fund support recently, as 26% of the company’s hedge fund shareholders on June 30 sold out of the stock during Q3. Among that list was Gregg Moskowitz’s Interval Partners and Steven Boyd’s Armistice Capital. 35 hedge funds were still long DPZ on September 30, good for ninth place among restaurant stocks.
While DPZ lost quite a bit of hedge fund support during Q3, that likely boiled down to fund managers capitalizing on the stock’s strong rally this year through the end of September, during which shares gained 45%. They have slid by 6.61% since the end of Q3. Domino’s delivered robust U.S same store sales growth of 17.5% during Q3, which helped the pizza chain post 17.9% revenue growth and 21.5% earnings growth year-over-year.
8. Jack in the Box Inc. (NASDAQ:JACK)
Jack in the Box Inc. (NASDAQ:JACK) ranks eighth, being owned by 38 hedge funds at the end of September, a 46% jump from the beginning of 2020. JACK’s fiscal Q4 results were strong, as the chain grew same store sales by 9.6% even as transaction volume declined by 12.3%. The momentum appears to be continuing into the company’s fiscal Q1 of 2021 thanks to strong digital initiatives and ongoing menu innovation. On the latter front, CEO Darin Harris revealed during the company’s latest earnings call that JACK is preparing to launch a major new chicken product line in its efforts to continue gobbling up more market share.
7. Papa John’s International, Inc. (NASDAQ:PZZA)
The second pizza chain to crack the top ten is Papa John’s International, Inc. (NASDAQ:PZZA), which hedge funds have steadily been taking bigger slices of since the middle of 2019. Hedge fund ownership of the stock has grown by 73% since then, with Steve Cohen’s Point72 among the funds adding PZZA to their portfolios during the latest quarter.
The pizza category has enjoyed renewed growth during the pandemic and Papa John’s has been one of the year’s biggest winners, with CEO Rob Lynch saying the company has added more than 8 million new customers in 2020 during a recent interview on CNBC. PZZA shares have enjoyed a similarly strong 2020 as DPZ’s, but have likewise slumped recently, sliding by 14% since the beginning of September.
6. Yum China Holdings, Inc. (NYSE:YUMC)
One of the 10 Best Chinese Stocks To Buy Now closes out the first half of the list, that stock being Yum China Holdings, Inc. (NYSE:YUMC), which was split off from Yum! Brands, Inc. (NYSE:YUM) in 2016. Hedge fund ownership of YUMC has surged by 63% since the first quarter to rank it as the only international restaurant stock to crack the list.
Yum China improved its margins by nearly a full percentage point to 18.6% during Q3 thanks to increased productivity and by realigning its cost structure. Year-over-year same store sales comps showed further improvement during Q3, though they remain down by single digits at both KFC (-6%) and Pizza Hut (-7%). Thanks to new restaurant openings, overall revenue inched up by 1% year-over-year, while net income grew by 10% after adjusting for one-time items.
Click to continue reading and see the Top 5 Restaurant Stocks to Buy Now. Disclosure: None. Top 10 Restaurant Stocks to Buy Now is originally published at Insider Monkey.