In this article we present the list of Top 10 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, 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.
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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.
5. Darden Restaurants, Inc. (NYSE:DRI)
Darden Restaurants, Inc. (NYSE:DRI) ranks as the fifth best restaurant stock to buy now. 41 hedge funds were long DRI on September 30, a 64% surge since the middle of 2019. Andreas Halvorsen’s Viking Global and George Soros’ Soros Fund Management are among DRI’s largest hedge fund shareholders.
Darden operates several casual dining brands, including Olive Garden, LongHorn Steakhouse, The Capital Grille, and Bahama Breeze. Darden has managed to remain profitable in the current challenging environment, earning diluted EPS of $0.72 in its fiscal Q2 and the company appears poised for a strong 2021 in what is shaping up to be a reduced competitive environment in the casual dining space following the closure of over 100,000 restaurants in the U.S.
4. Yum! Brands, Inc. (NYSE:YUM)
Yum! Brands, Inc. tops its Chinese counterpart (which ranked sixth), coming in at fourth place. After a massive exodus from the stock between 2015 and 2017 that was partly due to the split from its Chinese operations, hedge funds have been slowly trickling back into YUM since early 2018. 42 of them were long YUM on September 30.
As with many other restaurants, YUM has been focused on boosting its digital initiatives this year, which has resulted in its system-wide digital sales mix rising above 30%. Digital sales grew by 25% year-over-year to $4 billion during Q3 even as same store sales were flat (at those locations which were open). Taco Bell was YUM’s strongest performing brand during Q3, growing same store sales by 3%, while Pizza Hut and KFC suffered 3% and 4% dips respectively.
3. Chipotle Mexican Grill, Inc. (NYSE:CMG)
The coronavirus hasn’t been able to stop Chipotle Mexican Grill, Inc. (NYSE:CMG) shares from continuing their impressive run since the start of 2018, during which they’ve gained over 350%. The stock, which was owned by 51 hedge funds on September 30, has gained another 65% this year.
Ensemble Capital, which owned 21,387 CMG shares at the end of September, discussed the stock in its Q3 investor letter, praising the company for its fresh food concept and ensuring the consistency and quality of its food by paying a premium to retain its staff in an industry that is marked by high employee turnover. Ensemble Capital noted that while CMG shares may seem expensive at the moment, the company has a great opportunity ahead of it to grow into those expectations, including through its plans to double its store count in the U.S. International expansion, an area in which Chipotle has thus far treaded lightly, could drive additional growth further down the line.
2. McDonald’s Corporation (NYSE:MCD)
A major new stock pick of billionaire Ray Dalio, McDonald’s Corporation was owned by 65 hedge funds at the end of Q3, a 14% jump from a quarter earlier. Nonetheless, it remains well below its all-time ownership heights of several years ago, when McDonald’s was a frequent contender as one of the top 30 stocks among hedge funds.
McDonald’s appears to be in the midst of a strong Q4 in terms of same store sales growth, which has been attributed to the company’s rollout of new baked goods, as well as the return of the McRib. Those menu additions are just a sampling of the initiatives that McDonald’s has undertaken recently as part of its new growth strategy, which also includes digital, delivery, and loyalty upgrades, as well as more effective marketing.
1. Starbucks Corporation (NASDAQ:SBUX)
Narrowly topping the list of the best restaurants to buy now is Starbucks Corporation (NASDAQ:SBUX), which was held in the 13F portfolios of 66 hedge funds on September 30. Among the list of prominent shareholders is Bill Ackman’s Pershing Square, Stanley Druckenmiller’s Duquesne Capital, and Ray Dalio’s Bridgestone Associates.
Starbucks continues to expand globally at a breakneck pace, approaching 33,000 locations this year, an increase of about 16,000 during the previous decade. The upscale coffee chain anticipates even greater growth in the decade to come, aiming for more than 22,000 openings by 2030, many of which will be located in China. The company is even tapping into the power of AI to drive future customer growth and retention. Given its impressive growth prospects and enduring brand loyalty, it’s not at all surprising that Starbucks ranks as the top restaurant stock to buy now.
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