Investing legend Peter Lynch once wrote, "Invest in what you know," meaning often the best investments are ones in which you transact frequently. Take restaurants, for example: In 2017, the average American household spent $3,400 in restaurants, an increase of 6.7% from the year before.
Even though the average consumer spends 6% of their annual income at restaurants, many investors avoid the sector. At first glance, that's understandable, as food cost variability, labor pressure, and fickle consumers are difficult to navigate. However, strong operators and concepts make for great investments. With that in mind, we asked three Motley Fool contributors for their favorite picks. Read on to find out why Cracker Barrel Old Country Store (NASDAQ: CBRL), Wingstop (NASDAQ: WING), and McDonald's (NYSE: MCD) made the cut.
What's not to love about this down-home Southern store chain?
Anders Bylund (Cracker Barrel Old Country Store): This Southern-flavored combined restaurant and gift store chain is doing a lot of things absolutely right. The company runs at a 7% net profit margin and produces a 36% return on equity, both of which are nearly unheard of in the slim-margin restaurant industry. Moreover, Cracker Barrel's earnings have increased by an annual average of 13% over the last five years, and the company offers a generous 3.1% dividend yield.
The company is also as reliable as Grandpa's wind-up chronometer, delivering positive earnings surprises in 10 of the last 11 earnings reports. Revenues came in above analyst expectations in 5 of the last 6 quarters.
Yet investors appear to have lost interest in this reliable earnings machine. The stock has traded largely sideways over the last three years, including an 8% six-month drop. Cracker Barrel shares are trading at a fairly affordable 18 times trailing earnings and 1.3 times annual sales, well below the industry averages of 28 and 3.1, respectively.
So this stock appears to be primed for a strong recovery. On top of all that, Cracker Barrel is increasing its TV ad spending at the moment in order to support a revamped chicken menu. The company is facing uncertain food costs due to international trade tensions, but the upside looks juicy enough to outweigh the risks of rising ingredient costs. There is also activist investor pressure to divest some noncore operations and maybe sell the whole company to the highest bidder, but management's recent record of success gives the company an effective shield to any undue influence from outsiders. And if major shareholder Biglari Holdings manages to find a buyer, that should unlock plenty of that hidden value in a hurry.
I think it's downright hard to lose with this well-managed company, especially at these reasonable stock prices.
Wingstop (still) isn't stopping
Jamal Carnette, CFA (Wingstop): In January, I wrote that Wingstop was a restaurant stock to watch, as the stock was up 10% year to date. I was wrong -- I should have been more direct and stated it was a buy. Since then the stock has continued to rally and is now up 40% in 2019.
The most recent catalyst was an upgrade from Stifel on account of national advertising and digital ordering initiatives. The latter is encouraging, as now more than 30% of orders come from a digital channel. Digital growth has turbocharged the restaurant's top line: In the first quarter Wingstop posted 15.8% systemwide sales growth, with the key domestic same-store sales growth coming in at 7.1%.
Long-term investors shouldn't overthink this and wait for a pullback -- as a $3 billion market cap company, Wingstop has a long runway for unimpeded growth as the fast-casual concept has no true competition. (Buffalo Wild Wings is a full-service sports-focused concept while other restaurants treat wings as an add-on item.) Wingstop is just getting started and should continue to outperform the market.
Buy this with a side of fries
Chris Neiger (McDonald's): McDonald's stock wasn't all that impressive last year, as its share price inched up just 3%. But management's recent focus on boosting U.S. sales and managing costs has brought back positive sentiment toward McDonald's stock and has help push its share price up 16% since the beginning of this year.
In the first quarter of this year, U.S. sales were up 4.5% in the quarter, after hovering around 2% growth in the previous two quarters. The company has attributed part of the increase to new marketing campaigns it's rolled out, including its 2 for $5 Mix and Match deal, Donut Sticks, and its Bacon Event.
Additionally, McDonald's offset some of the increasing cost pressures from rising labor and commodity costs with higher prices (up 2% in the first quarter) and has expanded the percentage of restaurants that are franchised. All of this has helped the company's operating margin to increase to more than 42% -- up 60 basis points from the year-ago quarter -- and helped push the company's franchise margin dollars up 7%.
The company has plans to expand its food delivery in the U.S. and abroad, which should help McDonald's drive sales up even further and help the company tap into one of the biggest food trends right now. If McDonald's continues to boost U.S. sales and manage costs, investors should consider snatching up this juggernaut restaurant stock.
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Anders Bylund has no position in any of the stocks mentioned. Chris Neiger has no position in any of the stocks mentioned. Jamal Carnette, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.