Spot the Best Restaurant Stock: Chipotle, McDonald’s, Starbucks, Yum

Source: https://www.flickr.com/photos/mr_t_in_dc/

Source: https://www.flickr.com/photos/mr_t_in_dc/

It is difficult to succeed in the restaurant industry. There is a lot of competition, and input costs are often volatile. Therefore, a lot of investors choose to look for opportunities elsewhere. However, if you can find winners in the sector, you can make a lot of money. Everybody needs to eat, and people often develop regular eating patterns. Therefore, if you invest in the right restaurant stock, you’ll be investing in a company that has loyal, repeat customers and pricing power. This is a recipe for consistent profits on strong margins that are, in most cases, recession resistant.

In what follows, I suggest four ideas that investors should consider for their portfolios. All of these companies have proven to succeed in the areas I mention above, and they all have the potential to be winners in the long run.

1. Chipotle Mexican Grill (NYSE:CMG)

This is a favorite stock among investors. The company’s inexpensive Mexican restaurants are located throughout the country and they are extremely popular. As a result, the company has become one of the largest restaurant owners in the world; Chipotle currently has a market capitalization of $16 billion. Going forward, investors and management alike believe that the company will continue to be able to grow.

However, despite the fact that analysts are bullish and despite the fact that I think the company will be able to grow, there are a couple of issues. The first is rising food prices. The company’s first-quarter earnings took a hit because food input costs rose. If this continues, the company’s sales growth will remain weak. The company fought back by raising prices, but this can alienate customers and dissuade them from going back. The second is that the stock is extremely expensive — investors have extremely high expectations for the company, and so it trades at over 40 times earnings.

So while Chipotle may be a winner, it is also vulnerable to a correction, and I would stay away.