Recent news about McDonald's (MCD) has focused on turmoil at the top of the company (the CEO has been replaced) and turmoil at the bottom -- as in bottom line -- (sales and profits are down). Since 2011, Mickey D's, the world's largest restaurant company, has struggled with competition, changing tastes and its own missteps.
But don't get a stomachache and ignore all restaurants just because of McDonald's well-publicized travails. Other companies in the industry are doing well, and if you are looking for solid, middle-of-the-road investment opportunities, these should help quench your hunger.
Brinker International's (EAT) name may not sound appetizing, but its restaurants are serving up plenty of tasty meals. One of its nameplates is Chili's Grill & Bar, a casual dining restaurant chain that seems nearly ubiquitous around the country. The other is Maggiano's Little Italy, which serves, of course, Italian-American cuisine. The company and its franchisees operate more than 1,500 restaurants in 32 countries and two territories, and have more than 100,000 employees.
A recipe for analyzing companies was put forth in the 1990s by well-known investment guru and mutual fund manager, James P. O'Shaughnessy. Through his research, he discovered that looking at market capitalization, earnings per share persistence (EPS must increase in each of the past five years) and price-to-sales ratios (a measure of how well priced is a stock), is an effective way of identifying very promising investment opportunities. Then he took all the stocks that passed these three tests and ran them against relative strength, which measures how well a stock has done in the past 12 months vs. the overall stock market, and picked the top 50 to recommend. I automated his strategy and Brinker is in this top-50 grouping, earning the restaurant equivalent of a five-star review.
Another restaurant chain, whose name incongruously combines a delectable dessert with an image of industrialization, is The Cheesecake Factory (CAKE). If you have ever been to one of this company's restaurants, you know it is tough to describe its menu other than to say it is large, very large. Considered upscale casual, the company offers more than 250 menu items at its nearly 200 restaurants. Like Brinker, The Cheesecake Factory is an O'Shaughnessy favorite -- and for the same reasons that Brinker is so well liked. Both of these companies earn high accolades after a rigorous tasting...ummm...testing strategy.
When a major player in an industry gets into trouble, it is easy to decide the entire industry is worth ignoring. Do not let McDonald's unappetizing performance leave a bad taste in your mouth for restaurants. Brinker International and The Cheesecake Factory are cooking up a storm and their customers' tummies are happily contented.