Restaurant stocks are issued by companies that operate food service establishments. These venues could be fast-food chains or sit-down restaurants.
Top Restaurant Companies
These eating establishments are some of the best companies on the Wall Street menu.
People have always needed to eat, but the idea of eating in a restaurant is a little less ancient. The first restaurants were the common rooms of inns, where guests could find food, drink, and entertainment. But the first eating establishments to be deemed restaurants (with a fixed menu) were in France, such as La Grande Taverne de Londres, established in the 1780s.
Restaurants grew in popularity in the United States, especially in urban areas and in the West. After WWII, the explosion of car culture played into a new type of eating venue: the fast-food chain. This type of quick-service restaurant might serve customers anything from fried chicken to a burger with fries. By and large, many of them operated along the lines of a franchise model, which contributed to their rapid growth and a steady stream of earnings for the company.
In addition to fast-food chains that pepper the landscape of America, like the McDonald’s Corp and Dunkin’ Donuts, consumers in the last few decades have become familiar with sit-down restaurant chains. Some sit-down restaurants such as BJ’s Restaurants and Breweries and Texas Roadhouse continue to maintain themselves as publicly traded, singular companies revolving around one brand name. Others, such as Olive Garden and Applebees, are part of a larger restaurant group.
Fast-food chains and restaurant groups do tend to see consistent earnings due to consumer loyalty, but it’s important to realize that food service is a consumer discretionary (unlike food, which is a consumer staple). That said, it’s hard to go wrong with something like McDonald’s stock. And if you can catch an up-and-coming food service business in its days of dwelling among the proverbial dollar stocks, you can see astronomical EPS growth (earnings per share) as investors saw recently with Chipotle Mexican Grill, for example.
Today much of America is saturated with restaurants, and many businesses are looking for ways to increase their earnings other than increasing same-store sales, such as global expansion. Examples of this include the push of brands like KFC and Taco Bell into Asia with Yum China, or the almost incessant opening of a new Starbucks somewhere around the world.
Restaurant Stocks to Eat Up in 2020
McDonald’s (NYSE: MCD)
McDonald’s Corporation (NYSE: MCD) is one of the most recognized brand names in the world and synonymous with American culture. Serving meals to almost 70 million diners in 100 countries in almost 38,000 outlets, McDonald’s is the largest restaurant chain in the world. McDonald’s began humbly as a Southern California fast-food restaurant operated by the McDonald’s brothers. After partnering with businessman Ray Kroc (who later bought out the company) McDonald’s began operating along the franchise model, and mostly still does today. Individual business owners can rent land from McDonald’s and operate their own McDonald’s franchise on it, if they maintain strict adherence to company policies. The upshot of this model is that McDonald’s owns around $18 billion of real estate, which Ray Kroc would half-jokingly label as his true business.
Chipotle (NYSE: CMG)
Chipotle Mexican Grill (NYSE: CMG) specializes in Americanized Mexican food such as tacos and mission-style burritos. In 1993, Chipotle had 16 restaurants in Colorado. McDonald’s became a major investor five years later. By 2006, McDonald’s had fully divested from Chipotle, while the Tex-Mex fast-casual chain had grown to 500 locations. Today there are over 2000. Founder Steve Ells got the idea for Chipotle from a visit to San Francisco, where he saw the popularity of Mexican food. Bringing that idea back to Denver, Colorado, he determined he would need to sell around 100 burritos daily to maintain profitability; after one month, Chipotle was selling 1,000 burritos daily. Ells used the cash flow from his business to open another location, then fundraised to open more locations. Today Chipotle is also available in the UK, France, Germany, and Canada, capitalizing on a global interest in Tex-Mex food.
Yum! Brands (NYSE: YUM)
Yum! Brands (NYSE: YUM) is the name behind Taco Bell, KFC, Pizza Hut, and WingStreet. Yum! divested itself of Long John Silver’s and A&W in 2011. The diverse range of brand names in the Yum family gives it the distinction of being one of the largest fast-food restaurant companies in terms of the number of locations, with more than 43,000 restaurants worldwide. Around 3,000 are company-owned, and the rest are franchised. Yum! Brands started as a spinoff from Pepsico, which had acquired a few restaurant chains in the 1970s and 80s (namely, Pizza Hut, Taco Bell, and KFC). When Pepsico made the decision to exit the restaurant business, they created Tricon Global Restaurants to become a holding company for Pepsico's former fast-food venues. When Tricon Global Restaurants acquired Yorkshire Global Restaurants (owner of Long John Silver’s and A&W), their name was changed to Yum! Brands. Today the company is very focused on international expansion, opening franchises in surprising locations like the West Bank, Mongolia, India, and Ethiopia, not to mention more predictable ventures like Yum China.
Restaurant Brands International (TSX: QSR)
Restaurant Brands International (TSX: QSR) is a Canadian-based international restaurant holding company formed in a 2014 merger between Burger King and Tim Hortons—the former is one of the largest and most recognizable US burger chains, and the latter is Canada’s largest quick-service stop for coffee and donuts. In 2017, RBI expanded by purchasing Popeyes Louisiana Kitchen, bumping it into the number 5 spot for the largest global operators of fast-food restaurants. The majority owner of RBI is a Brazillian-American investment firm 3G Capital, who owns 51% of the stock; the remaining shares are publicly traded, and previous investors of Tim Hortons or Burger King certainly enjoyed the added value to their holdings. Today one of RBI’s prime areas of focus is expanding the international presence of Tim Hortons, with recent openings in the Philippines and plans to open 1,500 locations in China.
Darden Restaurants (NYSE: DRI)
Darden Restaurants (NYSE: DRI) is a holding company that owns sit-down restaurants, in both the casual and fine dining sectors. Eddie V's Prime Seafood and The Capital Grille are its two more upscale offerings, while more casual holdings include recognizable names like The Olive Garden, Bahama Breeze, LongHorn Steakhouse, Yard House, Seasons 52, and Cheddar's Scratch Kitchen. This is a grand total of 1,500 locations and 150,000 employees, making Darden Restaurants the biggest full-service restaurant company globally. The company story begins with Will Darden, who opened Red Lobster to see how a seafood restaurant would do in an inland location. The restaurant was successful, but Darden was not able to expand, so he sold his business to consumer staples giant General Mills, which in turn spun off its holdings as Darden Restaurants in 1995. Red Lobster was later sold to Golden Gate Capital in a $2 billion cash deal.
JAB Holding Company
JAB Holding Company (short for Johann A. Benckiser) is an international conglomerate privately held by the German Reimann family. JAB owns sizeable shares in brand names across a diverse range of businesses, but their investments in food include American fast-casual restaurant chains such as Panera Bread, Au Bon Pain, Einstein Brothers Bagels, Insomnia Cookies, Peet’s Coffee, and Krispy Kreme Doughnuts. Some of these are owned by JAB outright. Panera Bread, in particular, is noteworthy for being the best-performing restaurant stock on Wall Street during its 20-year run as a public company. By the time it was acquired by JAB in 2017, Panera, which also owns Au Bon Pain, had provided investors with an 86-fold return. JAB’s diverse holdings indicate a track record of buying up successful companies, some of which, like Krispy Kreme, may be looking to exit the publicly traded market and return to private ownership.
Focus Brands is an affiliate of Roark Capital Group, a $13 billion private equity firm that focuses on leveraged buyouts of midsize companies in several industries including the restaurant and food business. Brand names in the Focus Brands portfolio include the sandwich chain Schlotzsky’s, ice creamery Carvel, pastry-baking venues like Cinnabon and Auntie Anne’s, and smoothie-focused Jamba Juice. Additionally, Focus Brands has dining venues like McAlister’s Deli and Moe’s Southwest Grill. Focus Brands combined portfolio of food venues consists of around 6,000 locations across the United States, which include 850 Jamba Juice locations, 1,200 Cinnabon bakeries, and 1,500 Auntie Anne’s pretzel shops. Schlotzsky’s is one of its smaller, more regional brands, having only 350 locations—but is noteworthy for having only one sandwich, “The Original” when it first opened.
Domino’s (NYSE: DPZ)
Domino’s Pizza (NYSE: DPZ) is the world’s largest seller of pizza in terms of sales, with around $3.5 billion in 2018 revenue. Domino’s Pizza began in the 1960s with the Monaghan brothers buying a local Michigan pizza store, DomiNicks, for $1400. After opening two more stores, they renamed their business Domino’s and created a logo—fittingly a domino tile—with three dots to represent their three stores. They had planned to add a new dot for every store they opened, but that idea had to be shelved when the franchise model they embarked on ballooned their brand’s footprint to 200 stores. By 2006 Domino’s had 5,000 US stores and 3,000 overseas, though the Monaghan brothers had already sold their interests in the company. Domino’s is noteworthy for some of its unique marketing campaigns. One such ad, made in response to poor consumer ratings, showed customers making suggestions about how to improve the pizza, which was then followed by the unveiling of a new recipe.
Dine Brands Global (NYSE: DINE)
Dine Brands Global (NYSE: DINE), formerly known as IHOP, was formed when the International House of Pancakes acquired the self-proclaimed neighborhood bar and grill, Applebee’s. Today there are 1,830 Applebee’s around the US, a casual dining venue that creates a family-friendly ambiance paired with a sports bar. The restaurants serve mainstream American cuisine like ribs, salads, chicken, pasta dishes, and burgers. There are around 1,800 IHOP restaurants in the Americas and the Middle East, which focus primarily on breakfast foods along the lines of a pancake house—though they do have lunch and dinner options. It is worth noting that a vast majority of IHOP and Applebee’s locations are locally owned franchises, and only a small percentage are corporate-owned restaurants. Applebee’s was formed in the 1980s, and IHOP in the 1950s; the merger between the two, initiated by IHOP, occurred recently in 2007.
It can be tempting to look for potentially big winners among the cheap stocks to buy now. But the stock market is notoriously hard to predict, even for seasoned financial advisors. To that end, consumers might consider buying shares of an exchange-traded fund (ETF). Such a fund is like a mutual fund in that it’s a pooled investment vehicle, but more like a regular stock in that ownership must be purchased with priced shares, instead of contributing an amount of money determined by the retail investor.
While there are no ETFs purely dedicated to restaurant businesses, there are food-focused ETFs that contain sizable amounts of capital invested in restaurant companies. One such ETF is the Invesco Dynamic Leisure and Entertainment ETF (PEJ), around 33% of which is invested in restaurant holdings like McDonald’s, Chipotle, and Starbucks. Another ETF to consider is the Invesco S&P SmallCap Consumer Discretionary ETF (PSCD), with 10 of its 97 holdings being restaurant stocks such as Wingstop and Shake Shack.
Should You Invest in Restaurant Stocks?
Restaurants are a consumer discretionary industry. While consumers always need food, they don’t always need to get food from a restaurant. As such, the restaurant industry can be impacted by market cycles. However, that does not have to mean that restaurant stocks become the biggest stock losers. Many of the biggest restaurant chains have expanded globally, giving them huge amounts of cash flow from around the world, even if one area is impacted by a market downturn.
Additionally, the franchise model of many restaurant businesses means that individual investors put up capital, and simply rent their business rights from the restaurant company, which is great for reducing risk. Since the parent companies don’t need to invest in expanding their physical footprint (leaving that work up to local entrepreneurs), they have more funds on hand to pay out to investors in the form of dividends.
All said, restaurant stocks are consumer discretionaries, but their product is not as dispensable as others, making them more stable than other components of the consumer discretionaries sector. While you wouldn’t want your stock portfolio to be entirely comprised of restaurant stocks, their aggressive patterns of expansion make them great long-term growth stocks, while their consistent revenues generated by franchise modeling are great for a dividend investing strategy—so it’s not a bad idea to put companies like McDonald’s, Chipotle, or Yum! Brands on your list of stocks to buy.
Companies Mentioned in This Article