Back to top
Read MoreHide Full Article

Restaurant stocks have failed to find favors with investors so far in 2016.  As a result, most of the restaurateurs have been grappling with sluggish comps and soft traffic growth.

In fact, per a report by TDn2K’s Black Box Intelligence, the second quarter of 2016 was the second consecutive quarter in which the restaurant industry failed to generate positive comps growth. Same-store sales growth during the quarter dipped 0.7% year over year, following a 0.2% decline witnessed in the first quarter, thereby continuing the somber mood at the restaurant industry.

Also, the Zacks Industry Rank for the Retail-Restaurants industry currently stands at #199. This puts the industry in the bottom 25%, corresponding to a negative outlook.

However, notwithstanding a long list of apprehensions, there are a few restaurant stocks that are performing well at the moment.

One such company is Shake Shack Inc. (SHAK - Free Report) . Notably, this Zacks Rank #2 (Buy) stock debuted as a public company on Jan 15, 2015 and saw its stock price scale higher in the months that followed. Though Shake Shack came crashing down in the later part of 2015, this has made the stock more reasonably priced as its Forward Price to Earnings ratio dropped from the previous levels of nearly 1000 times earnings.

However, despite being a relatively expensive stock, Shake Shack has solid growth potential given its strong brand, solid balance sheet and lucrative store economics. Also, menu innovation and limited time offerings have been boosting comps.

Shake Shack has also been focusing on highly valued millennial consumers who prefer brand experience and healthy food. Such efforts to meet consumer preferences have made it a hit among the younger generation. In fact, the company’s cult following and successful expansion into various cities around the world have been driving growth.

Moreover, the company’s earnings surpassed the Zacks Consensus Estimate in all of the last four quarters, with an average beat of 31.69%. Also, over the past 60 days, the company has been seeing an upward trend in earnings estimate revision for 2016 and 2017. Further, for full-year 2016, sales growth is pegged at 35.4% while EPS is expected to grow a solid 41.8%.

However, Shake Shack is not the only company looking up in the U.S. restaurant industry. Many companies in the space have held ground in spite of the recent chaos, thereby beating the sluggish restaurant trend.

4 Other Winners

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

Headquartered in Dallas, TX, Wingstop Inc. (WING - Free Report) , together with its subsidiaries, franchises and operates restaurants under the Wingstop brand. Its restaurants offer cooked-to-order, hand-sauced, and tossed chicken wings. Solid unit development, investments in technology along with migrating to a national advertising platform, should continue to drive growth at Wingstop.

Notably, the stock has rallied over 47% year to date and upward estimate revisions for 2016 and 2017 earnings, over the past 60 days, add to the optimism. Moreover, for full-year 2016, sales and EPS are projected to grow a respective 17.2% and 17.6%.

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 company’s astounding earnings growth, significant improvement in the top line and operating margin along with innovative product introductions hold well for long-term growth.

The stock has returned nearly 12% on a year-to-date basis and has been seeing an upward trend in earnings estimate revision for 2016 and 2017, over the past 60 days. Additionally, for full-year 2016, sales growth is pegged at 10.2% while EPS is likely to improve a solid 55.3%.

Headquartered in Calabasas Hills, CA, The Cheesecake Factory Incorporated (CAKE - Free Report) operates many upscale, high volume casual dining restaurants. Notably, Cheesecake Factory restaurants have posted positive comps in 26 consequent quarters. Going forward, various initiatives to boost sales and traffic volumes like roll out of an improved server training program and its mobile payment app coupled with menu innovation should aid in keeping up the trend of positive comps.

Notably, the company has surged nearly 10% year to date. The company’s differentiated menu, operational distinction and unique ambiance has been appealing to customers. Further, for full-year 2016, sales growth is poised at 7.8% while EPS is expected to grow 15.4%.

Headquartered in Dublin, OH, The Wendy's Company (WEN - Free Report) is the world's third-largest quick-service hamburger company. Wendy’s sales initiatives like menu innovation and promotional offerings are driving growth. Moreover, increased investments in technology are quickening service and thus, resulting in increased customer count. The company’s international business is also poised to be a long-term growth driver.

Adding to the positives, upward estimate revisions for 2016 and 2017 earnings, over the past 60 days, reinstate hope on the stock’s prospects. Further, for full-year 2016, EPS is expected to grow 20.1%.

Bottom Line

Though the restaurant industry has its share of pitfalls in the form of sluggish comps growth and traffic trends along with rising labor costs, effective sales initiatives undertaken by the companies should keep them going.

Now See Our Private Investment Ideas

While the above ideas are being shared with the public, other trades are hidden from everyone but selected members. Would you like to peek behind the curtain and view them? Starting today, for the next month, you can follow all Zacks' private buys and sells in real time from value to momentum  . . . from stocks under $10 to ETF and option moves . . . from insider trades to companies that are about to report positive earnings surprises (we've called them with 80%+ accuracy). You can even look inside portfolios so exclusive that they are normally closed to new investors. Click here for Zacks' secret trades >>

Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »

More from Zacks Analyst Blog

You May Like