Restaurants are go-to meeting hubs for friends, family, and colleagues. Still, their demand can ebb and flow with the broader economy because consumers can always cook meals at home when times are tough, and the market seems to be baking in a downturn for the industry - over the past six months, it has pulled back by 11.1%. This drop is a noticeable divergence from the S&P 500’s 10.8% return.
Investors should tread carefully as any operational misstep or unforeseen change in preferences can have you catching a falling knife. Taking that into account, here are three restaurant stocks best left ignored.
Domino's (DPZ)
Market Cap: $13.73 billion
Founded by two brothers in Michigan, Domino’s (NYSE: DPZ) is a globally recognized pizza chain known for its creative marketing and fast delivery.
Why Are We Cautious About DPZ?
- Annual revenue growth of 5.3% over the last six years was below our standards for the restaurant sector
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 5.4%
Domino's is trading at $408.90 per share, or 22x forward P/E. If you’re considering DPZ for your portfolio, see our FREE research report to learn more.
Brinker International (EAT)
Market Cap: $6.93 billion
Founded by Norman Brinker in Dallas, Brinker International (NYSE: EAT) is a casual restaurant chain that operates the Chili’s, Maggiano’s Little Italy, and It’s Just Wings banners.
Why Is EAT Not Exciting?
- Lack of new restaurants puts a ceiling on its growth and reflects a focus on optimizing sales at existing locations
- Estimated sales growth of 3.5% for the next 12 months implies demand will slow from its six-year trend
- Challenging supply chain dynamics and bad unit economics are reflected in its low gross margin of 17%
Brinker International’s stock price of $152.75 implies a valuation ratio of 14.1x forward P/E. Read our free research report to see why you should think twice about including EAT in your portfolio.
BJ's (BJRI)
Market Cap: $914.1 million
Founded in 1978 in California, BJ’s Restaurants (NASDAQ: BJRI) is a chain of restaurants whose menu features classic American dishes, often with a twist.
Why Should You Dump BJRI?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its menu offerings and dining experience
- Lacking pricing power results in an inferior gross margin of 14.7% that must be offset by turning more tables
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
At $42.59 per share, BJ's trades at 18.5x forward P/E. Check out our free in-depth research report to learn more about why BJRI doesn’t pass our bar.
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