If there is one group of stocks that always seems to pay at the speculative end of the market, it’s restaurant stocks. And one company aggressive investors really need to have on their radar now is Zoe’s Kitchen, Inc. (ZOES).
Everything is a cycle, of course, but many money managers have sung the praises of this specific sector for years. Peter Lynch, the former manager of Fidelity’s Magellan Fund, invested and wrote about these stocks consistently.
Concepts come and go and tastes do change, so as a speculator/investor in these stocks, you just can’t fall in love with any position.
In recent history, perhaps one of the most successful restaurant stocks has been Chipotle Mexican Grill, Inc. (CMG), which is the leader of the “fast-casual” restaurant concept.
An outstanding wealth creator on the stock market, this fast-growing company is priced at a premium, but it deserves to be. Earnings estimates for this year and next are still going up.
One company that’s a really good one for traders is Fiesta Restaurant Group, Inc. (FRGI). This fast-casual franchiser operates “Pollo Tropical” and “Taco Cabana” restaurants. This stock can be volatile, but it’s still a growing operator with excellent potential for investors.
Of course, what we’re not talking about here is preferences, such as whether one person likes the food/concept. We’re talking about the businesses.
Hot New Restaurant IPO
As I mentioned earlier, Zoe’s Kitchen, Inc. is one company that aggressive investors really need to be watching. This was a recent successful initial public offering (IPO). The Texas-based, fast-casual operation sells a Mediterranean-inspired menu.
The stock went up when the broader market was experiencing its mini-correction in early October, and the company’s latest financials were excellent.
One of the most important features of a relatively new restaurant concept, in my view, is strong company ownership among locations.
Franchising is a proven business concept, but this can come later for a young company. What’s important is developing the concept, giving customers what they want at scale. Company-owned stores allow for greater control over the entire distribution chain.
In its third quarter of 2014, Zoe’s Kitchen generated comparable sales growth of 50% to $43.6 million. Comparable restaurant sales grew 5.9%, which is very good for the industry.
During the quarter, the company opened four new locations. As of last week, it had 128 company-owned restaurants and three franchisees. Management estimates the company will open between 30 and 32 new locations over the next year.
Because this newly listed enterprise is still at an early stage of development, it isn’t that profitable as of yet. But the company is being very deliberate with its new restaurant openings. While currently operating in 15 states, there is a great deal of potential for expansion with this concept.
Restaurant stocks are always worth following and so are new restaurant IPOs. A hot IPO was The Habit Restaurants, Inc. (HABT), which doubled when listed last week.
Of course, as is always the case, with hot IPOs come hot valuations. But institutional investors will pay for restaurant growth because it’s proven to work in the past and the herd mentality doesn’t change.
At this time, restaurant stocks appear to be a bullish indicator for the broader market. In the IPOs, Zoe’s Kitchen is going to be volatile, but the growth potential is there for the next several years.