May 23, 2016, at 9:44 a.m.
As summer approaches, the weather is warming, tourists are traveling and romances are budding, which means it’s becoming the busiest time of the year for restaurants.
But eateries that have been benefitting from low unemployment rates, cheaper fuel and dropping commodity prices may face new challenges as minimum wage increases take effect in a number of states.
According to the latest Restaurant Performance Index, released April 29, the RPI remained “in the expansion zone” in March, at 100.7, down 1.4 percent from February. The expectations index dipped slightly as well, down 0.2 percent to 101.2 in March, but the index continues to indicate a positive outlook for business during the coming months, according to the National Restaurant Association.
Although word-of-mouth is still considered the most important driver of restaurant business, a food establishment’s ability to promote itself through the Internet and mobile phones is becoming critical. One-third (32 percent) of patrons have used an app or coupon found online, and one in four diners have at least one restaurant-specific app on their phone, according to a recent RetailMeNot survey.
With the macro drivers of the marketplace evolving, which publicly traded restaurant brands are poised for growth in 2016?
“If you look at year-to-date performance, the stocks that have done the best have been either true growth stories, like Zoe’s Kitchen (ticker: ZOES) and Wingstop (WING), or ones with very low expectations like Arcos Dorados (ARCO) and Cracker Barrel (CBRL),” says Nick Mazing, founder of New York-based Ampera Capital, a long-short investment management firm focused on consumer equities. “The best-performing stock is actually Krispy Kreme (KKD), which is up almost 40 percent year to date, but this is because they are being acquired, so it is a one-off.”
In looking ahead and analyzing future growth potential, Mazing is considering the uphill climb U.S. restaurant stocks may face in the second half of 2016.
“While low unemployment, low gas and falling food commodity prices provided a nice tailwind into this year, restaurants will start to lap these results just as many scheduled minimum wage increases kick in. As a result, we will likely see a compression of both profitability and valuation metrics in the space,” Mazing says.
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For the second half of 2016, Mazing is looking at two companies that are not directly influenced by these factors.
“One is the McDonald’s master franchisee in Latin America, Arcos Dorados, which has done well year to date as the market is trying to price in the bottom in its largest market, Brazil, and look forward to a stabilization there,” he says. “We are also looking at Yum Brands (YUM), the parent of KFC, Taco Bell and Pizza Hut. The company has outlined a plan for a separation of its huge Chinese business and capital returns to shareholders.”
Dan Grote, certified financial planner at Latitude Financial Group in Denver, is also recommending Yum Brands because of its 11 percent gains this year. Also on his list is Bloomin’ Brands (BLMN), better known for Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, and Flemmings Prime Steakhouse and Wine Bar, which is up more than 12.5 percent so far this year, and Restaurant Brands International (QSR), known for the Burger King and Tim Hortons franchises, which has gained 7.7 percent year to date.
Grote believes the companies are doing well because of consumer strength and says cheaper fuel prices are just beginning to positively affect restaurants.
“While oil prices are rebounding, there is a lagging effect to our spending habits where the benefit of cheaper prices is empowering households to get out and spend. When we get out, we have to eat out. Restaurant stock advances are a byproduct,” he says.
Using social media as a metric to measure consumer satisfaction, the Boston-based strategy consulting firm, Stax, gives publicly traded companies a value that could also indicate future growth.
“Through our own research, we are learning that social media sentiment or engagement is not only an indicator of company success, but there is a predictive relationship between consumer ratings, positive blog sentiment and firm equity value and returns,” says Palash Misra, a director at Stax.
The firm examines the ratio of positive mentions that a brand receives online and compares it to negative mentions. A ratio greater than 1 implies there is comparatively more positive feedback or buzz surrounding a brand.
“For Starbucks (SBUX) and Panera (PNRA), we have observed sentiment scores exceeding 2.0 times for Starbucks and 1.2 times for Panera,” Misra says. “And as customer satisfaction or customer love is a leading indicator of company success, both companies appear to be regarded favorably in the eyes of customers.”
Just getting started?
Newbie investors shouldn’t shy away from individual stock ownership. There are a variety of advantages to holding individual stocks in your portfolio. These include the ability to tailor your portfolio to your values and beliefs – and avoid so-called “sin stocks.” Other advantages include more control over costs, tax and estate planning. Finally, an individual investor can be nimble, quick and decisive in their buys and sells, versus a mutual fund manager who often needs committee approval on portfolio shifts. Here are eight stocks to consider for a starter portfolio.
General Electric Co. (ticker: GE)
(SEBASTIEN BOZON/AFP/Getty Images)
Smart investment choices are those with strong businesses – like GE – that attract the best talent and possess sustainable long-term earnings power, says Henry To, partner at Newport Beach, California-based CB Capital Partners. “With GE now getting rid of most of GE Capital, and other non-core assets such as NBC Studio, the firm’s returns on equity should rise comfortably above 15 percent in the next 18 months as the focus returns to its industrials segment: power and water, oil and gas, energy management, aviation and transportation.”
Monsanto Co. (MON)
Monsanto is an innovator and dominant player in the global agricultural biotechnology industry. “Monsanto’s long-term growth story is underpinned by the ongoing rise in aspirational spending and protein consumption in large-population countries such as China and India,” To says. “For Monsanto, this is vital as the demand for its products, such as genetically modified seeds and agricultural productivity products, such as Roundup, is determined by demand for crops such as corn and soybeans, which are vital to the growth of the global cattle industry.”
CVS Health Corp. (CVS)
(Justin Sullivan/Getty Images)
CVS is an integrated health care provider with unique business structure in the industry. “CVS Health provides the cheapest price in generics in the industry, low-cost primary physicians with its Minute Clinics, retail presence and specialty drug distribution to long-term care facilities and nursing homes,” says David Yepez, portfolio manager at Exencial Wealth Advisors in Oklahoma City. “We believe the company will continue to benefit from the aging of the population in America.”
Walt Disney Co. (DIS)
Disney is a media conglomerate that monetizes its characters and franchises across multiple platforms including movies, home video, merchandising, parks and resorts and musicals. “The management team has shown great discipline and skill at allocating capital. Disneyland Shanghai and the Star Wars franchise should continue to provide growth for this company for the foreseeable future,” Yepez says.
Mark Zuckerberg’s company is the leading social network company in the world. “By organizing information about users, their social connections, and their activities on the Internet, Facebook has a lucrative database that is highly valuable for advertisers,” Yepez says. “Facebook is also becoming better at monetizing mobile advertising and is entering new areas such as virtual reality and messaging. In summary, Facebook is building the foundation to transform online advertising.”
Fluor Corp. (FLR)
Fluor is a global engineering and construction firm in the industrial sector. Kelley Wright, managing editor at Investment Quality Trends newsletter, likes Fluor based on its current dividend yield level. Through decades of analysis of high quality dividend-paying stocks, Wright found that stocks move between high-yield and low-yield prices areas that signal buying and selling opportunities. “The historically repetitive area of undervalue yield for FLR is 1.6 percent. Based on the current dividend of 84 cents, the undervalued price for FLR is $53.”
American Express Co. (AXP)
American Express is a global charge and credit card payment company. Wright calls AXP stock undervalued at $64 per share, and its dividend yield of $1.16 and 1.80 percent makes this a top pick. “The dividend yield is at a historically repetitive high area and its internal economic value, meaning what the company is worth versus how Wall Street has it valued, is very attractive,” he says.
Wal-Mart Stores (WMT)
Wal-Mart operates retail and wholesale discount stores under the names Wal-Mart and Sam’s Club. Wright says this company is undervalued based on its current dividend yield versus historical levels. “Based on the current dividend of $2, the undervalued price is $80,” Wright says.