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5 Restaurant Stocks to Buy for the Upcoming Holiday Season

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Wall Street is showing signs of stabilization in October after a meltdown last month. Although we are not out of the woods in terms of volatile factors, a sharp decline in stock market valuation in last month, a notable reduction in the new cases of the Delta variant of the novel coronavirus and a short-term Congressional deal related to government debt-ceiling boosted market participants’ confidence in risky assets like equities.

Meanwhile, as we are entering the holiday sales season, the restaurant industry is at the forefront of investors’ focus. This industry suffered a bloody blow last year due to pandemic-related restrictions. However, as the economy has reopened gradually this year buoyed by nationwide vaccination, the restaurant industry has regained some lost glory. The rapid spread of the Delta strain again raised questions about this industry’s future. Nevertheless, the situation looks promising in the fourth quarter.

Solid YTD Performance by Restaurant Industry

The Zacks defined Restaurants Industry — a part of the broader Retail Sector — is currently ranked in the top 42% industries. Specifically, it is ranked number 105 of 252 industries. Year to date, this industry has provided a handsome return of 13.8%.

The restaurant industry comprises several owners and operators of casual, upscale casual, fine dining, full-service and fast-casual restaurants. Some of the industry participants operate as roasters, marketers and retailers of specialty coffee. Some companies also develop, operate and franchise quick-service restaurants worldwide.

The industry body, the National Restaurant Association (NRA), in its mid-year 2021 survey published on Sep 30, reported that food and beverage sales in the restaurant and foodservice industry are projected to total $789 billion in 2021, up 19.7% from 2020.

Near-Term Drivers

First, as new cases of the highly-infectious Delta variant of coronavirus subdued last month, the reopening-oriented small-businesses are likely to benefit more. Per CDC, in the United States, 7-day average new cases came in at 97,909 as of Oct 4, compared with 160,284 a month ago.

Nationwide vaccination drives also resulted in the faster-than-expected reopening. Massive pent-up demand and holiday season sales in the fourth quarter are likely to boost the restaurant industry.

Second, restaurant operators’ focus on digital innovation, sales building initiatives and cost savings efforts have been acting as the major catalysts. With the growing influence of the Internet, digital innovation has become the need of the hour. Big restaurant chains are constantly partnering with delivery channels and digital platforms to drive incremental sales.

Third, the restaurant industry is gradually witnessing improving sales. The improvement can be attributed to the enhancement in fundamentals such as modifications in business processes, staffing, floor plans and technology. The industry participants are hiring, which indicates that the industry is finally coming out of the woods.

The NRA, in its mid-year 2021 survey reported that despite steady manpower recruitment in first-half 2021, eating and drinking places are short of nearly 1 million jobs or 8%, below the pre-pandemic employment levels.

Fourth, restaurant operators are benefiting from increasing off-premise sales, which primarily includes delivery, takeout, drive-thru, catering, meal kits, and off-site options such as kiosks and food trucks, owing to the coronavirus pandemic. Per the NRA, off-premise sales are likely to account for approximately 80% of the industry’s growth by 2025.

Our Top Picks

We have narrowed down our search to five restaurant stocks that have strong growth potential for the rest of 2021. These stocks have seen positive earnings estimate revision in the last 60 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in the past three months.

Zacks Investment ResearchImage Source: Zacks Investment Research

Chipotle Mexican Grill Inc. (CMG - Free Report) operates quick-casual and fresh Mexican food restaurant chains globally. It offers a focused menu of burritos, tacos, burrito bowls (a burrito without the tortilla) and salads. Chipotle has been benefitting from its digital efforts, Chipotlane add-ons and marketing initiatives.

Its initiatives like redesigned online ordering site, online payment for catering, meal customizations as well as collaboration with third-party providers for delivery bode well. Going forward, it continues to focus on the stage gate process as well as leveraging digital programs to expand access and convenience.

This Zacks Rank #2 company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.1% over the last 30 days.

Starbucks Corp. (SBUX - Free Report) has benefited from initiatives with respect to opening stores in new and existing markets, remodeling existing stores, deploying technology, controlling costs and aggressive product innovation and brand building.

Starbucks is strengthening its product portfolio with significant innovation around beverages, refreshments, health and wellness, tea and core food offerings. It is leaning toward the fast-growing categories like Cold Brew, Draft Nitro beverages, and plant-based modifiers, including almond, coconut, and soy milk alternatives. Apart from the numerous beverage innovations, Starbucks has also been making an effort to offer more nutritional and healthy products to its customers.

This Zacks Rank#2 company has an expected earnings growth rate of 14.8% for the current year (ending September 2022). The Zacks Consensus Estimate for current-year earnings improved 0.3% over the last 60 days.

McDonald's Corp. (MCD - Free Report) has been making every effort to drive growth in the international markets. McDonald’s is the world’s largest chain of fast-food restaurants with a presence in more than 100 countries. Its offerings have reached the billion-dollar brand status through sustained product innovation and geographic expansion.

With an almost 10% share of the global informal-eating-out market, there is ample scope for it to grow in the future as it boasts a scale advantage compared to its peers. Growing guest counts remains the company’s top priority and it intends to regain customers by focusing on food quality, convenience and value. Moreover, McDonald’s expects its velocity accelerators of Experience of the Future, digital and delivery to drive growth over the long term.

This Zacks Rank #2 company has an expected earnings growth rate of 49.3% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.6% over the last 60 days.

Domino's Pizza Inc. (DPZ - Free Report) operates as a pizza delivery company in the United States and internationally. It operates through three segments: U.S. Stores, International Franchise, and Supply Chain. The company offers pizzas under the Domino's brand name through company-owned and franchised stores.

The company is benefiting from a solid digital ordering system and higher global retail sales. This along with focus on robust international expansion bode well. Meanwhile, the company continues to witness growth in terms of its carryout and delivery businesses. Also, it has been emphasizing Car Side Delivery 2-Minute Guarantee with awareness campaigns.

This Zacks Rank #2 company has an expected earnings growth rate of 14.1% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.6% over the last 7 days.

Denny's Corp. (DENN - Free Report) is one of the largest restaurant companies worldwide, operating moderately-priced restaurants: Denny's, Hardee's, Quincy's, El Pollo Loco, Coco's and Carrows.

The company believes its restaurants benefit from the diversity of the restaurant concepts, the generally strong market positions and consumer recognition enjoyed by these chains. Restaurants also gain from a centralized support system for purchasing, menu development, human resources, management information systems, site selection, restaurant design and construction.

This Zacks Rank #1 company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved 2% over the last 60 days.

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