Man cannot exist on home-cooked meals, alone. This, and an improving economy, helps explain the current strength of the restaurant industry.
The segment is expecting a record year in 2015, according to the National Restaurant Association, with a tasty 3.8% uptick forecast for food service sales -- to $709 billion. In addition, new job creation in the sector is expected to grow faster than the national average -- for the 16th consecutive year.
Among the stellar performers in the restaurant industry is Red Robin (RRGB), which operates over 500 casual-dining establishments, with a focus on high-end hamburgers.
To choose stocks to recommend, I look to my guru strategies: Automated strategies I created by mirroring how Wall Street greats analyze stocks. One of these strategies is based on the writings of James P. O'Shaughnessy. Red Robin is a favorite coming out of this strategy.
Aspects of Red Robin liked by my O'Shaughnessy strategy:
- the company's market cap ($1.2 billion);
- earnings per share that have increased in each of the past five years;
- and a price-to-sales (P/S) ratio of 0.95 (1.5 is the maximum allowed under the strategy).
The P/S ratio highlights growth stocks still cheap enough to buy. Among the stocks that pass these three hurdles, 50 are chosen based on the their relative strength -- which measures how well a stock has performed versus the entire market over the past year. Red Robin's relative strength of 92 places it in this top-50 group.
Another casual-dining name favored by my O'Shaughnessy strategy is Brinker International (EAT), which operates more than 1,600 restaurants in 33 countries. It owns two restaurant brands -- Chili's and Maggiano's. Brinker enjoys a sizable market cap ($3.4 billion), EPS that has increased in each of the past five years and an acceptable P/S ratio of 1.13. And it has a relative strength of 77, which puts it in the top-50 group of companies.
Ruth's Hospitality Group (RUTH), operator of 140 upscale Ruth's Chris Steak House restaurants, is a favorite of my Peter Lynch-based guru strategy. This strategy focuses on price-to-earnings relative to growth, and measures how much the investor is paying for growth -- given the current stock price. A P/E/G of up to 1.0 is acceptable. Ruth's is well below this threshold -- at 0.71. The strategy also looks at a company's debt load: With zero debt, Ruth's is a winner under this strategy.
Even if you rarely eat at any of the restaurants owned by these three companies, they make for a tasty investment that would delight the palate of just about any investor.