Restaurants increase convenience and give many people a place to unwind. But the side dish is that they’re quite difficult to operate because high inventory and labor costs generally lead to thin margins at the store level. This leaves little room for error if demand dries up, and it seems like the market has some reservations as the industry’s returns were flat over the past six months while the S&P 500 was up 5.4%.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. With that said, here is one restaurant stock boasting a durable advantage and two best left ignored.
Two RestaurantStocks to Sell:
Wendy's (WEN)
Market Cap: $2.09 billion
Founded by Dave Thomas in 1969, Wendy’s (NASDAQ: WEN) is a renowned fast-food chain known for its fresh, never-frozen beef burgers, flavorful menu options, and commitment to quality.
Why Are We Wary of WEN?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
- Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
- High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Wendy's is trading at $10.95 per share, or 10.7x forward P/E. Read our free research report to see why you should think twice about including WEN in your portfolio.
The Cheesecake Factory (CAKE)
Market Cap: $3.18 billion
Celebrated for its delicious (and free) brown bread, gigantic portions, and delectable desserts, Cheesecake Factory (NASDAQ: CAKE) is an iconic American restaurant chain that also owns and operates a portfolio of separate restaurant brands.
Why Is CAKE Not Exciting?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
- Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $64.30 per share, The Cheesecake Factory trades at 16.7x forward P/E. If you’re considering CAKE for your portfolio, see our FREE research report to learn more.
One Restaurant Stock to Buy:
Texas Roadhouse (TXRH)
Market Cap: $12.5 billion
With locations often featuring Western-inspired decor, Texas Roadhouse (NASDAQ: TXRH) is an American restaurant chain specializing in Southern-style cuisine and steaks.
Why Will TXRH Outperform?
- Offensive push to build new restaurants and attack its untapped market opportunities is backed by its same-store sales growth
- Same-store sales growth over the past two years shows it’s successfully drawing diners into its restaurants
- ROIC punches in at 18.7%, illustrating management’s expertise in identifying profitable investments, and its returns are growing as it capitalizes on even better market opportunities
Texas Roadhouse’s stock price of $194 implies a valuation ratio of 26.6x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
Stocks We Like Even More
Donald Trump’s victory in the 2024 U.S. Presidential Election sent major indices to all-time highs, but stocks have retraced as investors debate the health of the economy and the potential impact of tariffs.
While this leaves much uncertainty around 2025, a few companies are poised for long-term gains regardless of the political or macroeconomic climate, like our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-micro-cap company Tecnoglass (+1,754% five-year return). Find your next big winner with StockStory today for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today
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