With weak oil prices having taken the wind out of investor sentiment, you might wonder which stocks might still have upward price momentum. The answer: restaurants stocks.
Many restaurant operations are reporting a material improvement in business conditions, and their operational strength continues to be a positive indicator for the equity market’s medium-term trend.
This is especially the case with Cracker Barrel Old Country Store, Inc. (CBRL), which is one holding I like to watch in this sector. This business is benefitting from increased traffic, rising prices, rising average checks, and—without question—lower oil prices.
Another chain that just beat the Street with its financials is Sonic Corp. (SONC). The stock has quadrupled since January of 2012 and rightly so—the company’s numbers are good. In its first fiscal quarter of 2015 (ended November 30, 2014), same-store system-wide sales improved 8.5%, with a similar gain at system-wide franchise stores and a 7.9% improvement at company-owned drive-ins.
Total revenues for the company’s most recent quarter came to $139.9 million, compared to $126.7 million a year ago. Meanwhile, earnings grew to $10.1 million, or $0.18 per diluted share, compared to $8.2 million, or $0.14 per share. Excluding a tax benefit in the comparable first quarter of 2014, the company’s earnings improved 38%.
Bottom-line per-share growth this fiscal year is targeted between 14% and 20%, and management currently feels that it may be able to beat the high end of this outlook. This year, the company plans to open 50 to 60 new franchise drive-ins. Sonic just started paying its first dividend and management expects to repurchase approximately $105 million of its own stock.
Sonic has continued price momentum in this stock market, but it’s not the only one; Fiesta Restaurant Group, Inc. (FRGI),which operates the fast-casual brands Pollo Tropical and Taco Cabana, should, too.
Total sales for the company’s third quarter of 2014 grew 10% to $155.3 million, while earnings improved 82% to $9.2 million. The stock is expensively priced, but expectations are lofty. Sales growth in 2015 for this restaurant chain is expected to accelerate over last year’s growth.
One stock I still think speculative investors should keep on their radar is Zoe’s Kitchen, Inc. (ZOES). This is a new initial public offering (IPO) that we looked at recently in these pages. (See “Zoe’s: The Hot Restaurant IPO Investors Should Be Following.”)
The stock market is churning and sentiment has no doubt been hurt by the dramatic action in oil prices. But this doesn’t change the fact that there are good businesses out there that are growing; many restaurant concepts are reporting better business conditions.
If there is one sector of the stock market that consistently offers attractive speculative opportunities its the restaurant business. The companies are easy to analyze and institutional investors will bid them to very high valuations if they have the liquidity.
Finally, one recent IPO worthy of investors’ time is El Pollo Loco Holdings, Inc. (LOCO). The company had a good start on the stock market, but the shares sold off with the recent market turmoil. It’s still small, but there’s been a lot of interest in the company’s shares and new franchise development is robust.