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Top 6 Restaurant Stocks to Gain From the Great Reopening

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·7 min read
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Last week was a disappointing one for Wall Street primarily due to concerns related to the impending inflation. The three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — fell 1.1%, 1.4% and 2.3% respectively, marking their worst weekly performance since Feb 26.

Moreover, with regards to economic data, retail sales in April were flat with March, missing the consensus estimate of an increase of 1.1%. However, one segment of retail sales — restaurant & bars — did fairly well in April. This industry is expected to perform far better in the near future buoyed by the great reopening of the U.S. economy.

Strong April for Restaurant & Bars

On May 14, the Department of Commerce reported that retail sales came in flat with March in April. However, March's sales were revised upward to a jump of 10.7% from February compared with an increase of 9.8% reported earlier. Notably, in absolute terms, retail sales of $619.9 billion in April were indeed a very strong number.

Importantly, unlike March, when the jump in retail sales was broad-based, only two categories — restaurants & bars and vehicle dealers — reported noticeable gains of 3% and 2.9%, respectively, in April.

Per a study by the industry body National Restaurant Association, the latest Census Bureau report revealed that the restaurant & bars industry generated $64.9 billion in sales in April on a seasonally adjusted basis. This was the third solid increase in total sales in the last four months.

However, despite this strong performance, April sales for this industry remained $1.3 billion or 2% below the pre-pandemic level in February 2020. Per the industry body, total sales of this industry between March 2020 to April 2021 lagged a massive $290 billion from its own estimation.

Moreover, the National Restaurant Association reported that the restaurant & bars industry added 187,000 manpower in April on a seasonally adjusted basis, marking the fourth consecutive month of payroll growth.

Despite this impressive performance, total manpower in the industry is still 1.7 million below the pre-pandemic level. Per the industry body, 84% of restaurant & bar owners said, " their staffing levels were lower than what they would normally be in the absence of COVID-19."

Therefore, both in terms of total sales and manpower recruitment, the restaurant & bar industry has huge untapped potential.

Double-Edged Growth Drivers

The Biden administration's priorities of nationwide COVID-19 vaccination and easing of the pandemic situation are the primary growth drivers of the restaurant & bar industry.

First, on May 13, Dr. Rochelle Walensky — Director of the Centers for Disease Control and Prevention — said American's who are fully vaccinated need not wear a mask or stay six feet away from others in most settings, whether outdoors or indoors, excluding travel.

On May 4, President Joe Biden announced that the latest target of his administration is to get 70% of U.S. adults receive at least one dose of a COVID-19 vaccine and having 160 million adults fully vaccinated by Jul 4.

Second, several economists and financial experts have cautioned that the gradual fading out of stimulus packages to individuals will have a negative impact on retail sales going forward. However, others have highlighted that Americans have a gigantic $2.3 trillion of excess or forced savings from their locked-in period.

Massive pent-up demand together with unprecedented personal savings should drive consumer spending in the near future. This is evident from a 10.7% jump in consumer spending in first-quarter 2021. Notably, consumer spending is the largest component of the U.S. GDP.

Consequently, a faster-than-expected reopening of the economy, easing of restrictions and robust pent-up demand and savings are likely to act as the positive near-term catalysts for the restaurant & bars industry.

Our Top Picks

We have narrowed down our search to six restaurant stocks that provided higher returns than the benchmark S&P 500 Index in April. These stocks have strong growth potential for the rest of 2021 and have seen solid earnings estimate revisions within the last 30 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our six picks in April 2021.

Bloomin' Brands Inc. BLMN owns and operates casual, upscale casual, and fine dining restaurants in the United States and internationally. It operates through two segments, U.S. and International. This Zacks Rank #1 company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 63.5% over the last 30 days.

Texas Roadhouse Inc. TXRH operates casual dining restaurants in the United States and internationally. It operates and franchises Texas Roadhouse and Bubba's 33 restaurants. This Zacks Rank #1 company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 29.9% over the last 30 days.

YUM! Brands Inc. YUM develops, operates and franchises quick-service restaurants worldwide. It operates in three segments: the KFC Division, the Pizza Hut Division and the Taco Bell Division. This Zacks Rank #2 company has an expected earnings growth rate of 13.81% for the current year. The Zacks Consensus Estimate for the current year has improved 5.4% over the last 30 days.

Chuy's Holdings Inc. CHUY owns and operates full-service restaurants serving a distinct menu of authentic Mexican food in Texas and 19 states in the Southeastern and Midwestern United States. This Zacks Rank #1 company has an expected earnings growth rate of 72.6% for the current year. The Zacks Consensus Estimate for the current year has improved 28.3% over the last 30 days.

Jack in the Box Inc. JACK is a restaurant company that operates and franchises through Jack in the Box quick-service restaurants, and is one of the nation’s largest hamburger chains. This Zacks Rank #2 company has an expected earnings growth rate of 42.6% for the current year (ending September 2021). The Zacks Consensus Estimate for current-year earnings has improved 3% over the last 7 days.

Dine Brands Global Inc. DIN owns, franchises, operates and rents full-service restaurants in the United States and internationally. This Zacks Rank #1 company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 39.8% over the last 30 days.

Zacks Names “Single Best Pick to Double”

From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.

You know this company from its past glory days, but few would expect that it’s poised for a monster turnaround. Fresh from a successful repositioning and flush with A-list celeb endorsements, it could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in a little more than 9 months and Nvidia which boomed +175.9% in one year.

Free: See Our Top Stock and 4 Runners Up >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Jack In The Box Inc. (JACK) : Free Stock Analysis Report

DINE BRANDS GLOBAL, INC. (DIN) : Free Stock Analysis Report

Texas Roadhouse, Inc. (TXRH) : Free Stock Analysis Report

Yum Brands, Inc. (YUM) : Free Stock Analysis Report

Chuys Holdings, Inc. (CHUY) : Free Stock Analysis Report

Bloomin Brands, Inc. (BLMN) : Free Stock Analysis Report

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