Restaurants are go-to meeting hubs for friends, family, and colleagues. Still, their demand can ebb and flow with the broader economy because consumers can always cook meals at home when times are tough, and the market seems to be baking in a downturn for the industry - over the past six months, it has pulled back by 10.2%. This drop is a noticeable divergence from the S&P 500’s 8.8% return.
Some companies can grow regardless of the economic backdrop, but the odds aren’t great for the ones we’re analyzing today. Keeping that in mind, here are three restaurant stocks we’re swiping left on.
Bloomin' Brands (BLMN)
Market Cap: $617.6 million
Owner of the iconic Australian-themed Outback Steakhouse, Bloomin’ Brands (NASDAQ: BLMN) is a leading American restaurant company that owns and operates a portfolio of popular restaurant brands.
Why Should You Dump BLMN?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Projected sales decline of 2.2% for the next 12 months points to an even tougher demand environment ahead
- 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $7.28 per share, Bloomin' Brands trades at 5.6x forward P/E. Dive into our free research report to see why there are better opportunities than BLMN.
BJ's (BJRI)
Market Cap: $757.1 million
Founded in 1978 in California, BJ’s Restaurants (NASDAQ: BJRI) is a chain of restaurants whose menu features classic American dishes, often with a twist.
Why Is BJRI Risky?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Gross margin of 14.7% is below its competitors, leaving less money for marketing and promotions
- Underwhelming 2.6% return on capital reflects management’s difficulties in finding profitable growth opportunities
BJ’s stock price of $34.22 implies a valuation ratio of 16.2x forward P/E. Read our free research report to see why you should think twice about including BJRI in your portfolio.
The ONE Group (STKS)
Market Cap: $88.84 million
Doubling as a hospitality services provider for hotels and resorts, The One Group Hospitality (NASDAQ: STKS) is an upscale restaurant company that operates STK Steakhouse and Kona Grill.
Why Does STKS Fall Short?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
- Earnings per share have contracted by 19.2% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
- High net-debt-to-EBITDA ratio of 7× could force the company to raise capital at unfavorable terms if market conditions deteriorate
The ONE Group is trading at $2.91 per share, or 6.2x forward P/E. Check out our free in-depth research report to learn more about why STKS doesn’t pass our bar.
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