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In the latest sign of the industry’s struggles, traffic from the restaurant sector declined over the third quarter. Stocks from the sector had become the favorite of investors over the last few years, but they have fallen out of favor recently due to a number of factors. These include rising costs, higher restaurant prices and the changing tastes of consumers.
However, long-term trends favoring eating out over eating at home are still in place. Moreover, operators willing to evolve and stand out in a competitive market will continue to reap profits. For interested investors, stocks of restaurants with strong fundamentals and sufficient capacity for innovation continue to be strong bets.
Rising Costs, Prices Hurt Sector
According to market research company NPD Group, footfall at U.S. fast food restaurants declined by 1% in the third quarter. This was the first fall in traffic experienced in five years.
Additionally, total restaurant visits also declined by 1%. A variety of reasons contributed toward such a contraction. These include higher restaurant prices, changing consumer preferences and a rise in costs, including rents and prescriptions.
According to recently released government data, the price of eating out has risen substantially this year. In contrast, data from October’s CPI release shows that the cost of groceries has declined by 2.4% on a yearly basis. This is the largest fall in food prices recorded over 12 months since the Great Recession ended in 2009. A worldwide glut in farm produce and expanding herds of livestock are responsible for the sharp fall in food costs.
Innovation, Long-Term Trends Hold the Key
Another major reason for the decline in traffic has been the changing taste and preferences of customers. Firstly, healthier menu options are being favored. More importantly, innovation and distinctive offerings are being rewarded with higher patronage.
For instance, McDonald's Corp.’s (MCD - Free Report) plans for 2017 have been greeted with much enthusiasm by industry watchers. The fast food major is planning to introduce new variants of its iconic Big Mac and fries. It will also launch a mobile based ordering service to boost traffic.
More importantly, long-term factors supporting the sector remain firmly in place. According to the USDA, expenditure on food outside homes has increased from 10% to 50% of total food purchases over 1904 to 2013. Also, sales at food services and drinking places have increased faster than retail sales since 2014. This trend is also far more stable and will continue to lift the sector once the current weakness abates.
Our Choices
At this point, the restaurant sector faces several daunting challenges. Despite an overall pickup in growth, higher prices and rising costs have hampered the sector’s growth. But this is unlikely to last for long.
Moreover, innovative operators with strong fundamentals continue to exhibit strength even in such an environment. Adding such stocks to your portfolio makes for a prudent choice. However, picking winning stocks may prove to be difficult.
This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
Performance of Top Restaurant Picks Versus Sector (30 Days)
Dave & Buster's Entertainment, Inc. (PLAY - Free Report) is an owner and operator of venues in North America that combine dining and entertainment. The company has recently raised its full year outlook
Dave & Buster's Entertainment has a VGM Score of B. The company has expected earnings growth of 33.3% for the current year. Its earnings estimate for the current year has improved by 4.9% over the last 30 days. The stock has returned 24.4% over the last 30 days, outperforming the Zacks Retail Food & Restaurants sector, which has returned 7.4% over the same period. The stock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The ONE Group Hospitality, Inc. (STKS - Free Report) develops, manages and operates a portfolio of high-energy restaurants, lounges and bars.
ONE Group Hospitality has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by more than 100% over the last 30 days. The stock has returned 9.9% over the last 30 days, outperforming the Zacks Retail Food & Restaurants sector, which has returned 7.4% over the same period.
Domino's Pizza, Inc. (DPZ - Free Report) ranks as the second-largest pizza chain in the world. Domino’s earnings have surpassed the Zacks Consensus Estimate in five of the trailing seven quarters.
Domino's has gained 2.5% year-to-date, underperforming the Zacks Retail Food & Restaurants sector, which has gained 7.4% over the same period. However, it has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 23.1% for the current year. Its earnings estimate for the current year has improved by 0.3% over the last 30 days. This provides a good opportunity to buy the stock.
McDonald's posted robust results in the third quarter of 2016, wherein both the bottom line and the top line outpaced the Zacks Consensus Estimate. Recently, the company raised its dividend by 6%.
McDonald's has gained 6.2% year-to-date, underperforming the Zacks Retail Food & Restaurants sector, which has gained 7.4% over the same period. However, it has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 14.2% for the current year. Its earnings estimate for the current year has improved by 0.3% over the last 30 days. This provides a good opportunity to buy the stock.
Cracker Barrel Old Country Store, Inc. (CBRL - Free Report) is a popular family dining chain where customers are treated to home-style cooking and care.
Cracker Barrel has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 9.1% for the current year. Its earnings estimate for the current year has improved by 2.2% over the last 30 days. The stock has returned 15.8% over the last 30 days, outperforming the Zacks Retail Food & Restaurants sector, which has returned 7.4% over the same period.
Where Do Zacks' Investment Ideas Come From?
You are welcome to download the full, up-to-the-minute list of 220 Zacks Rank #1 "Strong Buy" stocks free of charge. There is no better place to start your own stock search. Plus you can access the full list of must-avoid Zacks Rank #5 "Strong Sells" and other private research. See the stocks free >>
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5 Great Stocks to Beat the Restaurant Recession
In the latest sign of the industry’s struggles, traffic from the restaurant sector declined over the third quarter. Stocks from the sector had become the favorite of investors over the last few years, but they have fallen out of favor recently due to a number of factors. These include rising costs, higher restaurant prices and the changing tastes of consumers.
However, long-term trends favoring eating out over eating at home are still in place. Moreover, operators willing to evolve and stand out in a competitive market will continue to reap profits. For interested investors, stocks of restaurants with strong fundamentals and sufficient capacity for innovation continue to be strong bets.
Rising Costs, Prices Hurt Sector
According to market research company NPD Group, footfall at U.S. fast food restaurants declined by 1% in the third quarter. This was the first fall in traffic experienced in five years.
Additionally, total restaurant visits also declined by 1%. A variety of reasons contributed toward such a contraction. These include higher restaurant prices, changing consumer preferences and a rise in costs, including rents and prescriptions.
According to recently released government data, the price of eating out has risen substantially this year. In contrast, data from October’s CPI release shows that the cost of groceries has declined by 2.4% on a yearly basis. This is the largest fall in food prices recorded over 12 months since the Great Recession ended in 2009. A worldwide glut in farm produce and expanding herds of livestock are responsible for the sharp fall in food costs.
Innovation, Long-Term Trends Hold the Key
Another major reason for the decline in traffic has been the changing taste and preferences of customers. Firstly, healthier menu options are being favored. More importantly, innovation and distinctive offerings are being rewarded with higher patronage.
For instance, McDonald's Corp.’s (MCD - Free Report) plans for 2017 have been greeted with much enthusiasm by industry watchers. The fast food major is planning to introduce new variants of its iconic Big Mac and fries. It will also launch a mobile based ordering service to boost traffic.
More importantly, long-term factors supporting the sector remain firmly in place. According to the USDA, expenditure on food outside homes has increased from 10% to 50% of total food purchases over 1904 to 2013. Also, sales at food services and drinking places have increased faster than retail sales since 2014. This trend is also far more stable and will continue to lift the sector once the current weakness abates.
Our Choices
At this point, the restaurant sector faces several daunting challenges. Despite an overall pickup in growth, higher prices and rising costs have hampered the sector’s growth. But this is unlikely to last for long.
Moreover, innovative operators with strong fundamentals continue to exhibit strength even in such an environment. Adding such stocks to your portfolio makes for a prudent choice. However, picking winning stocks may prove to be difficult.
This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
Performance of Top Restaurant Picks Versus Sector (30 Days)
Dave & Buster's Entertainment, Inc. (PLAY - Free Report) is an owner and operator of venues in North America that combine dining and entertainment. The company has recently raised its full year outlook
Dave & Buster's Entertainment has a VGM Score of B. The company has expected earnings growth of 33.3% for the current year. Its earnings estimate for the current year has improved by 4.9% over the last 30 days. The stock has returned 24.4% over the last 30 days, outperforming the Zacks Retail Food & Restaurants sector, which has returned 7.4% over the same period. The stock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The ONE Group Hospitality, Inc. (STKS - Free Report) develops, manages and operates a portfolio of high-energy restaurants, lounges and bars.
ONE Group Hospitality has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by more than 100% over the last 30 days. The stock has returned 9.9% over the last 30 days, outperforming the Zacks Retail Food & Restaurants sector, which has returned 7.4% over the same period.
Domino's Pizza, Inc. (DPZ - Free Report) ranks as the second-largest pizza chain in the world. Domino’s earnings have surpassed the Zacks Consensus Estimate in five of the trailing seven quarters.
Domino's has gained 2.5% year-to-date, underperforming the Zacks Retail Food & Restaurants sector, which has gained 7.4% over the same period. However, it has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 23.1% for the current year. Its earnings estimate for the current year has improved by 0.3% over the last 30 days. This provides a good opportunity to buy the stock.
McDonald's posted robust results in the third quarter of 2016, wherein both the bottom line and the top line outpaced the Zacks Consensus Estimate. Recently, the company raised its dividend by 6%.
McDonald's has gained 6.2% year-to-date, underperforming the Zacks Retail Food & Restaurants sector, which has gained 7.4% over the same period. However, it has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 14.2% for the current year. Its earnings estimate for the current year has improved by 0.3% over the last 30 days. This provides a good opportunity to buy the stock.
Cracker Barrel Old Country Store, Inc. (CBRL - Free Report) is a popular family dining chain where customers are treated to home-style cooking and care.
Cracker Barrel has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 9.1% for the current year. Its earnings estimate for the current year has improved by 2.2% over the last 30 days. The stock has returned 15.8% over the last 30 days, outperforming the Zacks Retail Food & Restaurants sector, which has returned 7.4% over the same period.
Where Do Zacks' Investment Ideas Come From?
You are welcome to download the full, up-to-the-minute list of 220 Zacks Rank #1 "Strong Buy" stocks free of charge. There is no better place to start your own stock search. Plus you can access the full list of must-avoid Zacks Rank #5 "Strong Sells" and other private research. See the stocks free >>