Some of the best performing stocks this year have been restaurants. Restaurant stocks have been rallying for good reasons: business is strong, prices are up, and cost are coming down. These trends will continue for some time and the stocks should continue to rally. The charts below show some of the hottest restaurant stocks of 2011.
McDonolds (MCD)
Chipotle (CMG)
These stocks along with other high fliers (PNRA),(YUM), (DPZ), and (PZZA) have had an incredible run in 2011, but they are now expensive stocks. MCD trades at 19 times earnings while CMG trades at 52 times earnings. PNRA trades at 31 times earnings. YUM trades at 23 times earnings. DPZ trades at 21 times earnings. PZZA trades at 18 times earnings. All of these companies are operating very strongly, but the good climate for restaurants in general has also helped them.
It is time to look at another restaurant stock that has not done quite as well in 2011, but could offer significant upside in 2012. The stock worth considering is Darden (DRI).
DRI owns and operates a wide variety of restaurants: Olive Garden, Red Lobster, Longhorn, The Capital Grill, Seasons 52, Eddie V’s, and Wildfish. Things have not gone well in 2011 for DRI because of some operational issues. DRI tried a menu change at Olive Garden that was not successful. Darden’s history of success in the restaurant business means that it is likely to bounce back very strongly from tough times. Under the leadership of Clarence Otis (who took over in 2004) DRI shares have doubled. This dip in the stock should be looked at as an opportunity for long term investors. DRI shares year to date and shown below.
In addition to the strong history of the company, the stock also pays you to wait for the turnaround. DRI currently pays dividend of 3.75%, which is among the highest in the industry. DRI is cheap, trading at just 14 times earnings. DRI’s underperformance in 2011 is a great opportunity for long term investors.
Conclusion
Bullish trends are likely to continue for the restaurant industry, but DRI is a better way to play the trend than high flyers MCD, CMG, YUM, PZZA, PNRA, and DPZ.