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“Everyone Needs to Eat Everyday”: 10 Defensive Restaurant Stocks to Buy Amid Recession Fears

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·9 min read
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In this article, we discuss the 10 defensive restaurant stocks to buy amid fears of recession. You can skip our detailed analysis of these stocks and the current market situation, and go directly to 5 Defensive Restaurant Stocks to Buy Amid Recession Fears.

The restaurant industry was among the worst-off in the wake of the coronavirus crisis, resulting in billions of dollars in losses and hundreds of thousands of layoffs. As the industry navigates its way through one of the most challenging times in the history, restaurant operators face ever-changing conditions that challenge their businesses. According to the 2022 industry report presented by The National Restaurant Association, 96% of restaurant operators experienced supply delays or shortages of key food or beverage items in 2021, which are likely to persist in 2022. On the other hand, the foodservice industry is forecast to reach $898 billion in sales this year, while the workforce is projected to grow by 400,000 jobs, for a total industry employment of 14.9 million by the end of 2022.

Oftentimes, restaurant stocks are overlooked defensive options as consumers are hit by inflation. Despite falling under the consumer discretionary category, they are about as close to a staple as stocks within this grouping can get.

Barclays analyst Jeffrey Bernstein said in a note last month:

“With consumers overwhelmed by inflation, we believe bigger ticket purchases are the first to be delayed, as a new car, appliance, wardrobe & vacation are not essential. With that said, everyone needs to eat every day and while food at home is viewed as the more affordable option, food away from home is very dependable.”

The analyst states that the resilience of the industry is reinforced by inflation impacting the supermarket, insulating restaurants from food-at-home preference as traffic picks up post-pandemic. From a historical perspective, quick service restaurants have performed well in recessionary environments. Such restaurants, alongside food service distributors, who have been able to pass through the majority of their commodity cost inflation and much of their gas inflation, are forwarded as making up the “extreme staple-end of consumer discretionary.”

The Barclays analyst cited a number of restaurant stocks that he considers defensive, with McDonald's Corporation (NYSE:MCD), Starbucks Corporation (NASDAQ:SBUX), Sysco Corporation (NYSE:SYY), Restaurant Brands International Inc. (NYSE:QSR), Brinker International, Inc. (NYSE:EAT), and The Cheesecake Factory Incorporated (NASDAQ:CAKE) ranking among his most attractive picks.

Photo by Syed Ahmad on Unsplash

Our Methodology:

The stocks mentioned in this list are strong defensive restaurant plays in the current environment. Most of these stocks were mentioned in the report of Barclays' Jeffrey Bernstein last month.

Defensive Restaurant Stocks to Buy Amid Recession Fears

10. Wingstop Inc. (NASDAQ:WING)

Number of Hedge Fund Holders: 21

Wingstop Inc. (NASDAQ:WING) is an American multinational chain of aviation-themed restaurants specializing in chicken wings that was founded in 1994 in Garland, Texas, and began offering franchises in 1997. It ranks as the top small-cap selection in Jeffrey Bernstein's stock picks.

On July 1, Truist analyst Jake Bartlett lowered the price target on Wingstop Inc. (NASDAQ:WING) to $130 from $160 but maintained a Buy rating on the shares as part of a broader research note on restaurants that reflects store reopening data from recent web scrapes. The analyst is boosting his FY22 net openings outlook to 233 from 222 as domestic openings appear to have beat expectations, but attributes his reduced price target to growing macro risks.

The number of hedge funds tracked by Insider Monkey that reported holding stakes in Wingstop Inc. (NASDAQ:WING) rose to 21 in Q1 2022, up from 18 in the previous quarter. The total value of these stakes is valued at approximately $211.96 million. Among the hedge funds being tracked by Insider Monkey, London-based investment firm Fundsmith LLP is a leading shareholder in Wingstop Inc. (NASDAQ:WING), with 832,538 shares worth more than $97.69 million.

Like McDonald's Corporation (NYSE:MCD), Starbucks Corporation (NASDAQ:SBUX) and Sysco Corporation (NYSE:SYY), Wingstop Inc. (NASDAQ:WING) is gaining traction among hedge funds.

9. Restaurant Brands International Inc. (NYSE:QSR)

Number of Hedge Fund Holders: 23

Restaurant Brands International Inc. (NYSE:QSR) is a Canadian-American multinational fast food holding company. The company owns, operates, and franchises restaurants under the Tim Hortons, Burger King, Popeyes Louisiana Kitchen, and Firehouse Subs brands.

Earlier this May, Credit Suisse analyst Lauren Silberman lowered the price target on Restaurant Brands International Inc. (NYSE:QSR) to $68 from $73 and kept an Outperform rating on the shares. The analyst notes that the company reported a mixed Q1, with an EPS of $0.64 and EBITDA of $530 million. While sentiment has been challenged, in large part driven by an underperformance at the home market, Silberman believes that the continued improvement at Tim Hortons, the narrowing of the underperformance gap at Burger King U.S., and execution against the company's 5% long-term unit growth algorithm will encourage investors to get more constructive.

According to Insider Monkey’s data, Restaurant Brands International Inc. (NYSE:QSR) was found in 23 public hedge fund portfolios at the end of Q1 2022, compared to 24 in the earlier quarter. Bill Ackman’s Pershing Square is the biggest position holder in the company, with 23.8 million shares worth about $1.4 billion.

Here is what Pershing Square Capital Management has to say about Restaurant Brands International Inc. (NYSE:QSR) in its Q4 2021 investor letter:

“QSR is a high-quality business with significant long-term growth potential trading at a highly discounted valuation.

Comparable sales have recovered or are well on their way to recovery.

Tim Hortons Canada improved to a mid-single-digit decline during Q3 relative to 2019.

Burger King U.S. under new leadership and poised to make a recovery.

Burger King International and the Popeyes brand continue to grow well with strong same-store sales growth relative to 2019 levels. As underlying sales trends recover, QSR’s share price should more accurately reflect our view of its business fundamentals.

Management continues to make investments for future growth.

Digital: G&A investment to modernize digital platforms and loyalty programs.

New Units: Return to historical mid-single-digit unit growth in 2021 and beyond.

Brand Acquisitions: Purchased Firehouse Subs for $1bn in December.

Remains cheap relative to intrinsic value and peers.

Trades at less than 18x our estimate of 2022 free cash flow per share.

The company began repurchasing shares in August.

As underlying sales trends recover, QSR’s share price should more accurately reflect our view of its business fundamentals. QSR’s share price increased 3% in 2021 and has decreased 7% year-to-date in 2022.”

8. Dine Brands Global, Inc. (NYSE:DIN)

Number of Hedge Fund Holders: 24

Dine Brands Global, Inc. (NYSE:DIN) is a publicly traded food and beverage company based in Glendale, California. Founded in 1958 as IHOP, it operates franchised and corporate owned full-service restaurants including two restaurant concepts, Applebee's Neighborhood Grill & Bar and International House of Pancakes.

Dine Brands Global, Inc. (NYSE: DIN) reported solid earnings in Q1 2022, with earnings per share at $1.54, crossing estimates by $0.10. The company also declared revenues of $230.42 million for the quarter.

On June 9, Barclays analyst Jeffrey Bernstein lowered his price target on Dine Brands Global, Inc. (NYSE:DIN) to $88 from $93 and maintained an Overweight rating on the shares. Restaurants fall within consumer discretionary and with recessionary odds rising, some investors will view restaurants as "uninvestable," Bernstein tells investors in a research note. While he understands the sentiment, the analyst does not believe it is accurate and wouldn't use history as a guide.

As of Q1 2022, 24 hedge funds have positions in Dine Brands Global, Inc. (NYSE:DIN), down from 28 in the previous quarter. Glen Furhman’s MSD Capital is one of the most notable investors in Dine Brands Global, Inc. (NYSE:DIN) with over 740,545 shares worth more than $57.7 million.

7. The Wendy’s Company (NASDAQ:WEN)

Number of Hedge Fund Holders: 25

Headquartered in Dublin, Ohio, The Wendy’s Company (NASDAQ:WEN) operates as one of the world’s largest quick-service hamburger companies with more than 6,500 franchise and company restaurants in the United States and internationally.

Loop Capital analyst Alton Stump reiterated his Buy rating and $26 price target on The Wendy's Company (NASDAQ:WEN) after completing a round of checks with U.S. franchisees on June 21. According to the analyst, the findings suggest that same-store sales were up 5.0%-5.5%, an acceleration from 3.5%-4.0% growth during the first half of the current quarter, which implies quarter-to-date comps are tracking up 4.0%-4.5% ahead of his prior full Q2 estimates.

At the end of Q1 2022, 25 hedge funds held stakes in The Wendy’s Company (NASDAQ:WEN). The total value of these stakes came in at $797.9 million, down from $906.7 million in the previous quarter with 26 positions. Nelson Peltz’s Trian Partners was the company’s largest shareholder for the quarter, with total stakes worth more than $556.57 million

6. Performance Food Group Company (NYSE:PFGC)

Number of Hedge Fund Holders: 29

Performance Food Group Company (NYSE:PFGC) is a Virginia-based company that distributes a range of food and food-related products in the United States. One of the “big three” foodservice distributors according to Barclays analyst Jeffrey Bernstein, the company reaffirmed its fiscal 2022 net sales to be in a range of $50.5 billion to $51 billion earlier this June, while its adjusted EBITDA is expected to be in a range of $1 billion to $1.01 billion.

Barclays analyst Jeffrey Bernstein raised his price target on Performance Food Group Company (NYSE:PFGC) to $58 from $55 and maintained an Overweight rating on the shares post the investor day on June 30. The analyst says that with recessionary odds on the rise and "defensive positioning top of mind," he remains bullish on the shares.

According to Insider Monkey’s data, 29 hedge funds were bullish on Performance Food Group Company (NYSE:PFGC) at the end of Q1 2022, compared to 33 funds in the last quarter. The collective stakes held in Q1 amounted to $619 million.

Much like McDonald's Corporation (NYSE:MCD), Starbucks Corporation (NASDAQ:SBUX) and Sysco Corporation (NYSE:SYY), Performance Food Group Company (NYSE:PFGC) is a sure bet according to Jeffrey Bernstein.

Here is what ClearBridge Investments Select Strategy had to say about Performance Food Group Company (NYSE:PFGC) in its Q4 2021 investor letter:

“Performance Food Group is another example of a quality franchise bought during a depressing period for the foodservice industry that has flexed its balance sheet to make acquisitions of weaker players and continues to consolidate its leading market share.”

 

Click to continue reading and see 5 Defensive Restaurant Stocks to Buy Amid Recession Fears.

 

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Disclosure: None. “Everyone Needs to Eat Everyday”: 10 Defensive Restaurant Stocks to Buy Amid Recession Fears is originally published on Insider Monkey.