In this article, we will take a look at the top 10 restaurant stocks under $10.
The restaurant industry is showing signs of recovery as the ease in inflation levels and fall in gas prices is helping restore consumers’ purchasing power. In September, same-store sales for restaurants grew by 5.2% YoY. The significance of the US restaurant industry can be gauged by the fact that it accounts for 4% of the US GDP as opposed to a contribution of 3% and 2%, respectively, by the automobile and fashion industries. However, the restaurant industry is also struggling to match the increase in demand for its services. The US food service industry employs 14.9 million workers as of 2022 and is still facing labor shortages as the COVID-19 pandemic caused numerous workers to leave the industry and pursue opportunities in sectors that were less impacted by the pandemic. The labor shortage has also led some leading companies to trim their working hours by 7.5% or 6.4 hours per week compared to the pre-pandemic data.
To keep up with consumer preferences, restaurants are rapidly adapting to changing industry trends. The best restaurant stocks such as McDonald’s Corporation (NYSE:MCD), Yum! Brands Inc. (NYSE:YUM), and Domino’s Pizza, Inc. (NYSE:DPZ) have actively capitalized on the advancements in technology in the industry. Overall, 42% of all orders are now accepted through the online channel. The online medium gained pace during the COVID-19 pandemic, and despite the ease of the pandemic, customer preferences have not changed. Furthermore, 79% of customers think that technological advancement has enhanced their restaurant experience. The integration of social media with online ordering, along with inventions like self-ordering kiosks, has paved a new way for customers to enjoy food from their favorite restaurants at their convenience. Food ordering through an online medium has increased by 135% since June 2020.
Photo by shawnanggg on Unsplash
Our Methodology
In order to come up with our list of the best restaurant stocks to buy under $10, we have analyzed the growth drivers for each of these stocks to gauge the potential upside they can offer to investors in the long run. We have also discussed the analyst ratings and business fundamentals. These best restaurant stocks are trading under $10 as of November 8 and have been ranked according to the level of hedge fund ownership as of Q2 2022.
Top 10 Restaurant Stocks Under $10
10. The ONE Group Hospitality, Inc. (NASDAQ:STKS)
Number of Hedge Fund Holders: N/A
Stock Price: $7.61
The ONE Group Hospitality, Inc. (NASDAQ:STKS) is a Denver, Colorado-based developer and operator of upscale, casual, and vibrant restaurants and lounges that include STK Steakhouse and Kona Grill.
Joshua Long at Stephens started coverage on The ONE Group Hospitality, Inc. stock with a target price of $15 and an Overweight rating on September 22. The analyst thinks that the stock offers an attractive growth story for investors and has a strong presence in the fine-dining restaurant segment. The ONE Group Hospitality, Inc. will be able to leverage its position as a leader in the industry through its high-end social and experiential dining offerings. The company is operating a business that is light on assets and delivers high margins globally.
In Q3 2022, analysts anticipate The ONE Group Hospitality, Inc. to report revenue of $77.13 million, reflecting an increase of 7.8% from the same period last year. Meanwhile, the adjusted EPS is expected to be posted at 13 cents. In terms of comparable sales, analysts think The ONE Group Hospitality, Inc. is outperforming many of its competitors, making it one of the best restaurant stocks to hold.
9. FAT Brands Inc. (NASDAQ:FAT)
Number of Hedge Fund Holders: 1
Stock Price: $8.02
FAT Brands Inc. (NASDAQ:FAT) is a Beverly Hills, California-based operator of multi-brand restaurants that include Buffalo Express, Fatburger, Johnny Rockets, and Round Table Pizza. The company, with a rich history of over seven decades, has over 2,300 units globally and is the 25th biggest restaurant chain in the US.
With a portfolio of renowned restaurant brands, FAT Brands Inc. is looking to expand its presence in the US and global markets. The entity has opened its restaurants at 100 new locations this year and intends to close the year with the opening of 125 new restaurants. The corporation is capitalizing on growth opportunities across all markets. FAT Brands Inc. has a strong pipeline of 1,000 new locations as it has signed 180 new franchise agreements. These deals are expected to increase FAT Brands Inc.’s EBITDA by as much as 60% in the coming years, meriting the company’s inclusion in the list of the best restaurant stocks.
Experts believe that FAT Brands Inc. stock is undervalued compared to other restaurant franchisors. The company’s price-to-sales ratio of 0.33x and enterprise value-to-EBITDA ratio of 29.34x is significantly lower than companies like Domino’s Pizza.
8. Drive Shack Inc. (NYSE:DS)
Number of Hedge Fund Holders: 11
Stock Price: $0.66
Drive Shack Inc. (NYSE:DS) is a Dallas, Texas-based company known for bringing together the experience of a golf driving range with weekend brunches, birthday parties, and corporate events.
The company is transforming itself into an entertainment golf company while maintaining its roots in the traditional golf category, which generates healthy and stable cash flows. However, the company is expanding its presence in the puttery or entertainment golf segment. The construction of a puttery takes only six to nine months after the land lease agreement and is expected to generate EBITDA of $2 million to $3 million annually. Drive Shack Inc. is focusing on developing 50 puttery locations by 2024. Puttery generates the majority of its revenue from food and drinks but also provides diversification as gaming stands generate around 15% of the revenue.
In Q2 2022, Drive Shack Inc. saw the sales of food and beverages rise by $7 million. Traditional golf contributed $4.9 million to the increase in revenue, while entertainment golf made a contribution of $2 million. It must be noted that Drive Shack Inc. has a capital-intensive model, but the company can sustain that due to high EBITDA margins and the rise of entertainment golf amongst the younger generation. Drive Shack Inc. is trading at an EV/EBITDA ratio of 7.3x, in comparison to the industry average of 8.5x. Analysts see the company as a high-risk/reward option for investors looking to gain exposure to the restaurant industry. The company’s growth prospects make Potbelly Corporation (NASDAQ:PBPB) one of the best restaurant stocks to invest in.
7. Good Times Restaurants Inc. (NASDAQ:GTIM)
Number of Hedge Fund Holders: 5
Stock Price: $2.26
Good Times Restaurants Inc. (NASDAQ:GTIM) is a Lakewood, Colorado-based fast food restaurant chain known for its premium burgers and frozen custard through Good Times Burger and Bad Daddy’s Burger Bar. The company currently owns and franchises 36 Good Times Burger locations and 31 Bad Daddy’s Burger Bar.
Good Times Restaurants Inc. believes in maintaining a competitive pricing model and aims to increase prices slower than its peers. This is a new strategy being pursued by the company, as it previously used to be the highest-priced restaurant among its competitors. Experts believe Good Times Restaurants Inc. stock is cheap in terms of valuation against its competitors, and the share price could bounce back to higher levels once inflationary pressure eases. Good Times Restaurants Inc. reported that its same-store sales for Q4 FY22 increased by 5.9% for Good Times and 3.7% for Bad Daddy’s brand. The company performed well despite a tough macroeconomic environment, making it one of the best restaurant stocks to invest in.
Renaissance Technologies was the leading hedge fund investor in Good Times Restaurants Inc. during Q2 2022.
6. Potbelly Corporation (NASDAQ:PBPB)
Number of Hedge Fund Holders: 6
Stock Price: $4.99
Potbelly Corporation is a Lincoln Avenue, Illinois-based operator of a fast-casual restaurant chain known for its submarine sandwiches and milkshakes. The company, founded in 1977, intends to open 19 new locations through a franchise-based model in the next two years.
Potbelly Corporation has benefitted from the return of foot traffic in the central business districts and the airport shops as its offerings are suited for the on-the-go crowd. Potbelly Corporation reported same-store-sales (SSS) growth of 24.4% in Q1 and 17.2% in Q2 2022. The company continued the positive trend in Q3 2022 by posting the sixth consecutive quarter of same-store sales growth. Potbelly Corporation’s management wants to expand its presence to 2,000 locations, with 85% of the facilities franchised over the next decade.
Furthermore, the involvement of 180 Degree Capital Corp. as an activist hedge fund has resulted in a change of senior management of the company that is helping Potbelly Corporation achieve higher operational efficiency due to improved execution of strategic plans. The company’s strong fundamentals make it one of the best restaurant stocks to buy now.
First Eagle Investment Management increased its stake in Potbelly Corporation by 48% during the second quarter of the year.
Besides Potbelly Corporation, some of the popular companies in the restaurant industry include McDonald’s Corporation (NYSE:MCD), Yum! Brands Inc. (NYSE:YUM), and Domino’s Pizza, Inc. (NYSE:DPZ).
5. Carrols Restaurant Group, Inc. (NASDAQ:TAST)
Number of Hedge Fund Holders: 11
Stock Price: $1.68
Carrols Restaurant Group, Inc. (NASDAQ:TAST) is a Syracuse, New York-based company.
The company is the biggest franchisee of Burger King, with more than 1,000 locations across the world. Carrols Restaurant Group, Inc. provides exposure to a leading company like Burger King at a very low price. Furthermore, the company also has 55 Popeyes restaurants in its portfolio. In a research note issued to investors on September 22, Joshua Long at Stephens initiated coverage on Carrols Restaurant Group, Inc. stock with an Overweight rating and a target price of $4. The analyst has a bullish stance on the stock due to the improvement of Burger King’s brand image. The Miami, Florida-based fast food restaurant chain initiated the “Reclaim the Flame” strategic plan. Under the plan, Burger King intends to invest $400 million in the next two years in advertising and remodeling its restaurants, which is expected to expand Carrols Restaurant Group, Inc.’s margins.
Carrols Restaurant Group, Inc. stock is one of the best restaurant stocks that offers an attractive small-cap story and strong growth prospects. On the basis of EV to EBITDA and Price to Sales ratio, the company is significantly undervalued in comparison to its competitors.
4. Arcos Dorados Holdings Inc. (NYSE:ARCO)
Number of Hedge Fund Holders: 13
Stock Price: $7.47
Arcos Dorados Holdings Inc. (NYSE:ARCO) is a Buenos Aires, Argentina-based master franchise of McDonald’s in 20 Latin American and Caribbean countries.
We have picked Arcos Dorados Holdings Inc. as one of the best restaurant stocks because it provides exposure to one of the biggest fast-food restaurant chain operators at a share price of less than $10. Arcos Dorados Holdings Inc. is the biggest franchisee of McDonald’s, with 2,250 restaurants, and employs 90,000 workers.
Antonio Hernandez at Barclays started coverage on Arcos Dorados Holdings Inc. stock with a target price of $9 and an Overweight rating on September 27. The analyst anticipates the company to gain market share as growth strategies start being implemented. Furthermore, Hernandez sees Arcos Dorados Holdings Inc. stock trading at a significant discount against its five-year average P/E multiple.
3. Noodles & Company (NASDAQ:NDLS)
Number of Hedge Fund Holders: 15
Stock Price: $5.91
Noodles & Company is a Broomfield, Colorado-based operator of fast-casual restaurants.
Joshua Long at Stephens started coverage on Noodles & Company stock with a target price of $7 and an Overweight rating. The analyst believes the company offers an attractive growth story to investors in the limited-service restaurant category. The noodle-based menu acts as a differentiator for Noodles & Company, aiding the company in achieving healthy top-line growth. Furthermore, the growth of the digital channel is providing impetus to Noodles & Company’s stock and creating more brand awareness. The company is also making constant changes to its menu to remain in line with the healthy eating habits of the young generation, making it one of the best restaurant stocks to hold for the long run.
Of the 895 hedge funds in Insider Monkey’s database, Noodles & Company was held by 15 hedge funds as of Q2 2022.
2. Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB)
Number of Hedge Fund Holders: 18
Stock Price: $8.20
Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) is a Greenwood Village, Colorado-based operator of casual dining restaurants.
Over 81% of the locations are company-owned, while the rest are franchisee-owned. Red Robin Gourmet Burgers, Inc. operates on a high-low strategy that allows them to introduce innovative offerings for a limited time at a high price, resulting in healthy margins. Meanwhile, through attractive promotions, Red Robin Gourmet Burgers, Inc. generates strong sales by attracting less affluent customers too. In Q3 2022, increased pricing and positive menu mix shifts drove the 4.2% gain in overall company revenue to $286.9 million, an increase of $11.4 million from the same period a year earlier. Furthermore, the company’s royalty membership program has expanded to include 11 million members as of Q3, allowing the company to increase brand loyalty by offering rewards to consumers.
As of Q2 2022, Red Robin Gourmet Burgers, Inc. was held by 18 hedge funds.
1. Fiesta Restaurant Group, Inc. (NASDAQ:FRGI)
Number of Hedge Fund Holders: 19
Stock Price: $6.87
Fiesta Restaurant Group, Inc. (NASDAQ:FRGI) is a Dallas, Texas-based fast casual and quick service restaurant chain operator through its Pollo Tropical locations.
Fiesta Restaurant Group, Inc. has remodeled its stores to enhance the customer experience. The company is also working on overcoming labor shortages by enhancing operational efficiency and preserving its value perceptions in the mind of cost-conscious consumers. Following the disposal of 148 locations of the Taco Cabana business unit to Yadav Enterprises for $85 million, Fiesta Restaurant Group, Inc. intends to remain singularly focused. Fiesta Restaurant Group, Inc. has worked on upgrading its drive-thru facilities and reopened curbside pickup at all its locations. Online check averages were more than 8% over the company average in Q2 2022, and comparable restaurant sales increased by 14.9% compared to the second quarter of 2021. Analysts think the management’s efforts to expand margins make Fiesta Restaurant Group, Inc. one of the best restaurant stocks to buy now.
Factorial Partners raised its stake in Fiesta Restaurant Group, Inc. by 31% during Q2 2022.
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