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3 Restaurant Stocks to Keep Trade War Tensions Off the Menu

Ritujay Ghosh
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The erratic behavior of markets that started last month continues as worries over of a U.S.-China trade war have not yet been put to rest. The uncertainty has led to huge selloffs, resulting in one of the worst performances in March in recent years. While a number of industries have already started feeling the heat, with their shares taking a hit owing to panic selloffs, speculation is still rife as which sectors will suffer the most.

The trade tension, which started last month with President Donald Trump’s 25% and 10% tariffs on imported steel and aluminum, led to a string of retaliations, casting a pall over many industries since the next course of action to be taken by China and the United States is nearly impossible to predict.

Amid all the tension, there are still a few sectors that seem to be safe from the ongoing U.S.-China trade tussle. Foremost among these is the restaurant space, which so far seems to be unaffected by the tariffs, making its stocks safe bets. Moreover, restaurant sales are picking up, with an increase in wages, a higher number of jobs, greater spending power, high consumer confidence and a bullish economic outlook.

Trade War Fears Weigh on Markets

Markets have been gripped by trade war fears over the last month. In March, Trump imposed import duties on steel and aluminum, which was cheered by domestic steelmakers and aluminum companies. However, other major industries like automakers and airline manufactures like General Motors Company GM, Ford Motor Company F and The Boeing Company BA remained worried over an increase in input prices, which saw their shares plummeting. Further, Trump announced additional tariffs on $100 billion on other Chinese products, which is strongly being opposed by trade bodies.

If this wasn’t enough to make investors jittery, China imposed retaliatory tariffs on $3 billion of U.S. goods, followed by another $50 billion of tariffs, fueling fears of a trade war.  This has seen shares of all major companies with operations in China suffering. Although, China’s president Xi Jinping’s recent assurance that he will take steps to open the country’s economy and cut import duties has brought some relief to investors, trade-related tensions are far from over.

Given this scenario, companies with a domestic focus can be considered as holding promise. U.S. restaurants, which have been showing signs of steady growth with sales improving in March, seem to an ideal choice for investors right now. The outlook for the restaurant industry looks strong for the rest of 2018 as it is poised to grow on franchise-based business models, various sales-building efforts and increased use of technology.

Restaurant Industry to Grow on Higher Sales    

The U.S. Restaurant industry generated $799 billion in revenues in 2017, reflecting an increase of 4.3% from 2016, according to the National Restaurant Association (NRA). This also marks the eighth consecutive year of real growth in restaurant sales. Moreover, 2018 too has started on a good note with positive momentum in sales, as despite lower temperatures and higher-than-average snowfall, footfalls and sales in restaurants in March have grown.

According to wealth management, capital markets and asset management company Baird’s David Tarantino, sales in March were slightly higher than January and February and the fourth quarter of 2017. Also, restaurants are taking aggressive initiatives to boost sales keeping in mind the changing tastes of consumers. An increasing number of restaurants are coming up with sales-boosting models to drive demand.

Favorable Economic Scenario

The U.S. economy is stepping up, which is a good sign for the restaurant industry. Higher wages, a low jobless rate and upbeat consumer confidence, all indicate at a bullish economy. Higher wages mean more money in the hands of people, which definitely is a positive sign for the industry.

Moreover, U.S. consumer confidence touched a new 14-year high in March. The consumer sentiment index was 102.0 in March compared with 99.7 in February. This positive sentiment is definitely going to encourage consumers to dine out more.

Our Choices

Trade war fears certainly have made investors jittery. Although recent comments from Xi have somewhat eased fears, the worries are far from over. This has resulted in markets bleeding.

Naturally, these U.S. restaurants that have a domestic focus and are showing signs of growth for the past few years look appetizing. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

DineEquity, Inc DIN is a full-service dining company. It operates and franchises restaurants under both the Applebee's Neighborhood Grill & Bar and IHOP brands. DineEquity has expected earnings growth of 22.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 21.5% over the last 60 days. Moreover, the stock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ruth's Hospitality Group, Inc. RUTH is the largest fine dining steakhouse company in the United States, as measured by the total number of company-owned and franchisee-owned restaurants.

Ruth's Hospitality Group has a Zacks Rank #1. The company has expected earnings growth of 22.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 11.6% over the last 60 days.

Brinker International, Inc. EAT is one of the world's leading casual dining restaurant companies.

Brinker International has a Zacks Rank #2 (Buy). The company has expected earnings growth of 7.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.9% over the last 60 days.

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