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Forget Starbucks (SBUX), Buy These Restaurant Stocks Instead

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Starbucks Corporation (SBUX - Free Report) has been grappling with weak comps and sales of late, thanks to a traffic slowdown in the flagship U.S. market. Also, the company’s sales fell slightly short of expectations in the last three quarters. The company’s share price also plunged approximately 10% year to date.

Importantly, comps in the U.S. fell below 5% in the third quarter of 2016, breaking its impressive streak of 25 straight quarters of comparable-store sales growth of 5% or more. Comps were also weak in Europe and Japan. The disruption due to changes in the rewards program and its impact on one of the most popular yearly promotion – Frappuccino Happy Hour – impacted sales in the U.S. Following the weak performance, Starbucks trimmed its full-year sales and comps outlook.

Although Starbucks expects its digital initiatives to fuel stronger sales in the Americas in the next quarter, we are on the lookout for better visibility. Meanwhile, management believes that political uncertainty and he ‘’profound weakening in consumer confidence’’ have hurt overall restaurant traffic trends in the country.

Notably, same-store sales growth has been rather dull in the restaurant space during the first half of 2016, given the difficult sales environment. Despite economic growth, somewhat lower energy prices, and higher income, consumers have increased spending only modestly on dining out, which has resulted in low consumption over the last few months.

The situation has taken a worse turn, thanks to higher health care costs and tightened credit availability in the U.S. Moreover, unfavorable currency, a cooling Chinese economy and a tightening labor market have compounded woes for restaurateurs. Traffic has been weak as well.

Winning Picks

Starbucks might be going through a rough patch for now, but there are other restaurant stocks that are performing reasonably well.

With the help of the Zacks Stock Screener, we have zeroed-in on four stocks in the Retail-Restaurants industry with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

These stocks have had a good run on the bourse so far and have better prospects than Starbucks. Apart from the favorable Zacks Rank, these stocks have a healthy VGM style score, from our latest style score system. The VGM Style Score is a useful tool that allows investors to gain an insight into a stock’s strengths and weaknesses.

Here “V” stands for Value, “G” for Growth and “M” for Momentum and the score is a weighted combination of these three metrics. The Growth Style Score condenses the vital metrics from the company’s financial statements to get a true picture of the quality and sustainability of its growth. Our Momentum Style Score is a suggestion of the time to buy a stock to benefit from the rally in its share price.

Our research shows that stocks with VGM Scores of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 make solid investment choices.

Denny's Corp. (DENN - Free Report) , one of the leading restaurant companies, operate moderately-priced restaurants: Denny's, Hardee's, Quincy's, El Pollo Loco, Coco's and Carrows. Denny's restaurants are poised to gain from its concepts as well as centralized support system for purchasing, menu development and other initiatives.

The company has returned over 6.6% year to date and has a long-term expected EPS growth of 14.5%. For 2016, the company’s sales growth is poised at 3.1% while EPS is expected to grow 20.2%.

The stock sports Zacks Style Scores of “B” in Value, “A” in Growth and “D” in Momentum. It has a VGM score of “A” that is backed by impressive growth and rising estimates.

Papa John's International Inc. (PZZA - Free Report) operates & franchises pizza delivery and carry-out restaurants under the Papa John's brand. To gain a leading position among pizza delivery restaurants in each of its targeted markets, the company has developed a strategy to enhance customer satisfaction and retention, as well as establish recognition and acceptance of the brand. In this regard, the company’s focus on menu innovation, promotional offers and technology-driven initiatives bode well.

Notably, the stock has rallied over 46.1% year to date and has a long-term expected EPS growth of 15.5%. Moreover, for full-year 2016, sales and EPS are projected to grow a respective 4.6% and 17.4%.

The stock sports Zacks Style Scores of “D” in Value, “A” in Growth and “C” in Momentum. It has a VGM score of “B” that is backed by solid growth and rising estimates.

Headquartered in Syracuse, NY, Carrols Restaurant Group, Inc. (TAST - Free Report) operates through its subsidiaries and is one of the largest restaurant companies in the U.S. The company is the largest Burger King franchisee, based on restaurant count.

The stock has returned over 12.9% on a year-to-date basis and has a 3-5 year EPS growth rate of 20%. For 2016, sales growth is pegged at 10.2% while EPS is likely to improve a solid 55.3%.

The stock sports Zacks Style Scores of “A” in Value, “A” in Growth and “B” in Momentum. It has a VGM score of “A” that is also supported by escalating estimates.

Headquartered in Lake Forest, CA, Del Taco Restaurants, Inc. (TACO - Free Report) is the second largest Mexican-American QSR chain in terms of units in the U.S., serving more than 3 million guests each week.

Year to date, the stock has climbed nearly 10% and has a 3-5 year EPS growth rate of 16.7%. Further, for 2016, sales are expected to grow a healthy 20%.

The stock sports Zacks Style Scores of “B” in Value, “B” in Growth and “F” in Momentum. It has a VGM score of “B” that is backed by its solid growth trajectory.

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