Restaurant stocks have been hit rather hard in this inflationary climate. Thanks to customers’ resistance to higher prices, the pricing power of various fast-food firms has proven somewhat limited recently. However, I do think waning inflationary pressures and price rollbacks could help the quick-serve restaurant and fast-food firms stage a much-awaited comeback.
Sure, some restaurants may need to sacrifice their margins to reverse falling in-store traffic trends. Regardless, such a hit, I believe, will be transitory as firms look to get pricing right this time. In the second half, maximizing value will probably be the name of the game when it comes to winning the quick-serve restaurant crowds over, especially at the low end.
This piece will examine three oversold restaurant stocks that may be worth buying while they’re off from their highs.
McDonald’s (MCD)
McDonald’s (NYSE:MCD) investors have surely not been lovin’ the returns in the name of late. The fast-food giant has had a tough start to the year, with MCD stock now down close to 15% year-to-date.
While the company has pivoted back to “value” in a big way with its $5 meal deal, which is reportedly being extended, it’s not hard to imagine that the Golden Arches has taken a bit of a brand hit over these past two years, given its long-time reputation as a place for value-conscious customers to have lunch.
Indeed, I would have thought McDonald’s would have been one of the places for consumers to shelter themselves from the inflation hailstorm.
The good news is that the inflation-induced damage will be solvable via an aggressive value menu push. As inflation lingers for a while longer, perhaps the $5 meal deal may need to be extended again so the brand has more time to rebuild its standing as a high-value burger joint.
Wendy’s (WEN)
Wendy’s (NASDAQ:WEN) is another fast-food firm harshly affected by inflation-driven changes in diner preferences in recent years.
At the time of writing, WEN stock is down over 31% from its October 2020 peak. At these depths, shares trade at a mere 17.1 times trailing price-to-earnings (P/E), making them one of the best deals in the fast-food scene right now.
Additionally, the star of the show has to be the juicy 5.81% dividend yield, which could surpass 6% if Wendy’s woes mount from here despite its recent value menu efforts.
Compared to McDonald’s, which boasts a much smaller yield of 2.57% and a higher trailing P/E multiple (over 20 times), Wendy’s is cheaper and yield-heavier. Further, shares could have more upside if they can withstand the last phase of inflationary pressures. If you’re comfortable catching a falling knife, perhaps WEN stock is a name to keep tabs on as the firm looks to Europe for long-term growth.
Cava (CAVA)
Cava (NYSE:CAVA) is hardly a “cheap” restaurant stock with a multiple that would make your average AI chip stock look like a bargain. At the time of writing, CAVA stock goes for more than 320 times forward P/E. Still, I don’t think the P/E multiple does the high-growth restaurant chain justice, especially since the firm is in full-on growth mode.
The company may be barely profitable, but for an up-and-coming industry disruptor, I’d argue that profits matter less compared to investments made to take its expansion to the next level.
The 6.9 times price-to-sales (P/S) multiple doesn’t just make Cava more palatable; I view it as a better valuation metric for the hyper-growth restaurant chain. When the time is right, Cava can make a big profitability push. But, for now, Cava needs to spend money to make money, especially if it’s to have a remote shot at becoming the next Chipotle Mexican Grill (NYSE:CMG).
All considered, Cava is a higher-end, fast-casual chain with growth in its veins. And its stock looks somewhat cheap compared to its growth after the latest 13% pullback from all-time highs.
On the date of publication, Joey Frenette held a long position in MCD. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.