Restaurants are go-to meeting hubs for friends, family, and colleagues. But it’s not all sunshine and rainbows as they’re notoriously hard to run thanks to perishable ingredients, labor shortages, or volatile consumer spending. Unfortunately, these factors have spelled trouble for the industry as it has shed 2.5% over the past six months. This performance was disappointing since the S&P 500 climbed 2.5%.
Some companies can grow regardless of the economic backdrop, but the odds aren’t great for the ones we’re analyzing today. With that said, here are three restaurant stocks we’re swiping left on.
Shake Shack (SHAK)
Market Cap: $3.97 billion
Started as a hot dog cart in New York City's Madison Square Park, Shake Shack (NYSE:SHAK) is a fast-food restaurant known for its burgers and milkshakes.
Why Do We Think Twice About SHAK?
- Poor expense management has led to an operating margin of 2.4% that is below the industry average
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Shake Shack’s stock price of $98.79 implies a valuation ratio of 71.3x forward P/E. To fully understand why you should be careful with SHAK, check out our full research report (it’s free).
Papa John's (PZZA)
Market Cap: $1.17 billion
Founded by the eclectic John “Papa John” Schnatter, Papa John’s (NASDAQ:PZZA) is a globally recognized pizza delivery and carryout chain known for “better ingredients” and “better pizza”.
Why Should You Sell PZZA?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its menu offerings and dining experience
- Estimated sales decline of 6.1% for the next 12 months implies a challenging demand environment
- Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 3.3 percentage points
Papa John's is trading at $35.56 per share, or 23.3x forward P/E. If you’re considering PZZA for your portfolio, see our FREE research report to learn more.
El Pollo Loco (LOCO)
Market Cap: $415.8 million
With a name that translates into ‘The Crazy Chicken’, El Pollo Loco (NASDAQ:LOCO) is a fast food chain known for its citrus-marinated, fire-grilled chicken recipe that hails from the coastal town of Sinaloa, Mexico.
Why Should You Dump LOCO?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Subscale operations are evident in its revenue base of $490 million, meaning it has fewer distribution channels than its larger rivals
- Anticipated sales growth of 1.5% for the next year implies demand will be shaky
At $13.88 per share, El Pollo Loco trades at 14.4x forward P/E. Dive into our free research report to see why there are better opportunities than LOCO.
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