In this piece, we will take a look at 11 cheap restaurant stocks to buy now. If you want to skip our detailed analysis of the restaurant industry, then skip ahead to 5 Cheap Restaurant Stocks to Buy Now.
Food service, or what is commonly known as the restaurant industry is one of the biggest employers in the economy as well as being quite sizeable when it comes to monetary value. Restaurants provide part time and full time jobs to millions of people in America, with estimates from the 2022 State of the Restaurant Industry suggesting that the sector had employed 14.5 million people which was expected to grow by an additional 400,000 by the end of the year to sit at approximately 15 million people. In terms of monetary value, 2022 was a great year for the sector, as its revenues were expected to jump to $898 billion to mark a solid recovery from the coronavirus pandemic.
At the same time, most of the restaurant sector belongs to firms that are grouped together in the counter cyclical industry. This industry is sensitive to changes in the economy, with its fate tied to the discretionary spending power of consumers. Therefore, today's macroeconomic environment in America makes it a crucial sector to watch particularly with all the talk of a potential recession. In a recession, incomes drop and if there are job losses then people choose to turn their focus on essential products such as staples and decide to put off luxury spending such as fine dining. On the flip side, should a recession not materialize, then the sector could benefit as well.
At the same time, even though U.S. economic output has not sufficiently slowed down to tip the economy into a recession, the sector is still facing cost pressures due to rising inflation. In fact, research from McKinsey shows that even though the lockdown pressures of the coronavirus pandemic might have abated, these were replaced with a new set of hurdles for the restaurateurs. These, according to McKinsey, include supply chain pressures, higher wage rates due to a tight labor market, and rising rents in a broader inflationary environment.
At the same time, bigger firms are facing the heat from smaller and agile companies when it comes to the online delivery market as they are able to quickly set up shop and provide numerous loyalty programs to attract customers easily. The presence of the Internet expedites the process of growing the customer base since the smaller restaurants can reach more customers online and deliver them food without having to make substantial investments in infrastructure. These constraints in the industry also provide a high risk, high reward environment. While most restaurants are unable to beat median sector growth rates, those that are able to grow revenues sustainably and increase operating margins at the same time enjoy nearly four times as total shareholder returns when compared to their peers with growth but reducing margins.
Within the industry, the sector dubbed as Quick Service Restaurant Industry, or what you know as the fast food industry, is somewhat more resilient in an economic downturn. In fact, consumers actually move towards fast food outlets as their budgets drop. Adding to this, some of the biggest companies in the world are also fast food chains. Our research of the biggest fast food companies in the world shows that the top three largest firms are McDonald's Corporation (NYSE:MCD), Starbucks Corporation (NASDAQ:SBUX), Subway, and Yum! Brands, Inc. (NYSE:YUM). Collectively, these four operate close to 150 thousand branches all over the world. Yum! Brands, if you're unaware, is the owner of the most popular fried chicken franchise in the world, Kentucky Fried Chicken (KFC).
A glimpse at their share price gains this year shows what investors might be expecting from the economy. McDonald's shares have gained 11.58% year to date, Starbucks has stayed relatively flat at 0.77%, and Yum! has gained 6.77%. Safe to say, sentiment around even the fast food stocks have been relatively muted, influenced undoubtedly by the high inflation that has hit consumers. hard. Taking a brief look at their recent earnings, McDonald's had a strong first quarter where it posted a nice 12.90% EPS surprise. However, Yum! missed estimates by 6.2% and Starbucks led the pack with a solid 13.80% EPS surprise.
Since it's the star of the show, here's what Starbucks Corporation (NASDAQ:SBUX)'s management had to say during the firm's first quarter of 2023 earnings call:
The record demand for Starbucks Coffee in North America, we've reported on our Q4 call accelerated in Q1 and through holiday.
Despite the difficult operating environment that most retailers, particularly brick-and-mortar retailers experienced in the quarter. Average weekly sales in the U.S. company-operated stores reached a record high in Q1, exceeding the prior record set in Q4 of fiscal '22. This is — this next line, I think, is just — even when I read it, I'm surprised, with eight of the 10 highest sales days in our history recorded in the quarter. Consistently strong demand drove revenues up 14% to a quarterly record of $6.6 billion and a comp sale of 10% over last year. And Q1 momentum has continued in Q2. Active Starbucks Rewards membership in the U.S. exiting Q1 totaled over 30 million members, up four million members or 15% over last year and up 6% sequentially.
Loyal Starbucks Reward members drove a record 56% of tender, up 3% from last year, reflecting increased customer engagement throughout our system. Our convenience channels, Mobile Order & Pay, drive-through and delivery continue to fuel our business, delivering 72% of U.S. revenue in Q1. We continue to add high returning drive-throughs that attract new customers, expand our footprint and drive new customer occasions. Our over 6,600 store U.S. license business posted similar strong results with 32% revenue growth and double-digit comps across all operating segments. What's interesting to me is while grocery retailers are representative segment within our licensed business experienced traffic and spend related headwinds across their store base in Q1, their Starbucks business proved to be the bright spot bringing incremental traffic into their stores and driving sales for us as well.
With these details in mind, let's take a look at some cheap restaurant stocks to buy. Some top stocks are Brinker International, Inc. (NYSE:EAT), Darden Restaurants, Inc. (NYSE:DRI), and Dine Brands Global, Inc. (NYSE:DIN).
11 Cheap Restaurant Stocks to Buy Now
Photo by Heidi Kaden on Unsplash
Our Methodology
To compile our list of the top cheap restaurant stocks to buy, we first compiled a list of the top forty restaurant stocks with the lowest price to earnings ratios. Then, the top 22 with trailing P/E ratios significantly lower than the industry average of 32.06 were chosen. The stocks were then ranked through their P/E ratios out of which the ones with the 15 lowest P/E were sifted out. These were ranked through the number of hedge funds that had bought their shares during Q1 2023 in Insider Monkey's database of 943 hedge funds and the top 11 cheap restaurant stocks are as follows.
Biglari Holdings Inc. (NYSE:BH) is a steak franchise operator, with also insurance and oil and gas divisions. The shares are rated Hold on average. The company bought its restaurant operations over the past decade and has seen consistent cash flow from them.
7 of the 943 hedge funds part of Insider Monkey's Q1 2023 database had invested in the company. Biglari Holdings Inc. (NYSE:BH)'s largest shareholder is Mario Gabelli's GAMCO Investors Biglari Holdings Inc. (NYSE:BH) through an $11.5 million investment.
Just like Darden Restaurants, Inc. (NYSE:DRI), Brinker International, Inc. (NYSE:EAT), and Dine Brands Global, Inc. (NYSE:DIN), Biglari Holdings Inc. (NYSE:BH) is a great cheap restaurant stock finding favor with the hedge funds.
Nathan's Famous, Inc. (NASDAQ:NATH) operates franchise restaurants under the Nathan's Famous brand. The firm's fourth quarter of fiscal 2023 results saw it report 10.7% annual revenue growth and it also pays a 50 cent dividend. The shares are up 15.6% year to date.
As of March 2023, nine of the 943 hedge funds profiled by Insider Monkey had bought Nathan's Famous, Inc. (NASDAQ:NATH) shares. Mario Gabelli's GAMCO Investors is the largest investor among these, courtesy of a stake worth $20 million.
9. The ONE Group Hospitality, Inc. (NASDAQ:STKS)
Number of Hedge Fund Investors in Q1 2023: 11
Trailing P/E Ratio: 19.54
The ONE Group Hospitality, Inc. (NASDAQ:STKS) is a restaurant licensor and operator with a global presence. The firm's shares are rated Buy on average, and the average share price target is $12. Its fourth quarter saw it grow revenue by 5%, however, tough inflation took a toll on operating income.
As of this year's first quarter, only 11 of the 943 hedge funds part of Insider Monkey's database had bought The ONE Group Hospitality, Inc. (NASDAQ:STKS)'s shares. The largest investor is Aaron Weitman's CastleKnight Management with a $6.4 million investment.
El Pollo Loco Holdings, Inc. (NASDAQ:LOCO) both operates and franchises restaurants in several U.S. states. Its shares are rated Buy on average, and it had a strong first quarter where it reported a massive 40% earnings surprise. To boot, El Pollo Loco Holdings, Inc. (NASDAQ:LOCO) has also beaten analyst EPS estimates for all four of its previous quarters.
13 of the 943 hedge funds part of Insider Monkey's database had invested in the firm as of this year's March quarter. Jim Simons' Renaissance Technologies is the largest shareholder, through a stake worth $4.6 million.
RCI Hospitality Holdings, Inc. (NASDAQ:RICK) operates a variety of hospitality establishments such as nightclubs, restaurants, and cabaret clubs. It reported in July that sales for its nightclubs grow 14.1% annually. It has met or beaten analyst EPS estimates for all of its past four quarters.
13 of the 943 hedge funds profiled by Insider Monkey for their March quarter of 2023 shareholdings had invested in the company. Among these, RCI Hospitality Holdings, Inc. (NASDAQ:RICK)'s largest investor is Adam Wyden's ADW Capital courtesy of a $74 million stake.
Jack in the Box Inc. (NASDAQ:JACK) is the operator of the popular Jack in the Box restaurants. The firm has consistently grown sales in its owned restaurants for the past five quarters. The shares are rated Buy on average, and the company has a small $5 share price upside.
By the end of 2023's March quarter, 17 of the 943 hedge funds polled by Insider Monkey had held Jack in the Box Inc. (NASDAQ:JACK)'s shares. Steve Cohen's Point72 Asset Management is the largest shareholder, courtesy of 382,573 shares that are worth $33.5 million.
Brinker International, Inc. (NYSE:EAT), Jack in the Box Inc. (NASDAQ:JACK), Darden Restaurants, Inc. (NYSE:DRI), and Dine Brands Global, Inc. (NYSE:DIN) are some top cheap restaurant stocks.
