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. This makes spending somewhat unpredictable and has held back the industry over the past six months as its 1.1% gain has trailed the S&P 500 by 2.4 percentage points.

Investors should tread carefully as any operational misstep or unforeseen change in preferences can have you catching a falling knife. On that note, here are three restaurant stocks we’re passing on.

Restaurant Brands (QSR)

Market Cap: $26.64 billion

Formed through a strategic merger, Restaurant Brands International (NYSE: QSR) is a multinational corporation that owns three iconic fast-food chains: Burger King, Tim Hortons, and Popeyes.

Why Does QSR Give Us Pause?

1. Estimated sales growth of 4.3% for the next 12 months implies demand will slow from its six-year trend
2. Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 5.4 percentage points
3. Incremental sales over the last six years were less profitable as its 5.1% annual earnings per share growth lagged its revenue gains

Restaurant Brands’s stock price of $76.92 implies a valuation ratio of 19.1x forward P/E. To fully understand why you should be careful with QSR, check out our full research report (it’s free).

Darden (DRI)

Market Cap: $22.49 billion

Founded in 1968 as Red Lobster, Darden (NYSE: DRI) is a leading American restaurant company that owns and operates a portfolio of popular restaurant brands.

Why Is DRI Not Exciting?

1. Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 6.1% over the last seven years was below our standards for the restaurant sector
2. Gross margin of 21.8% is below its competitors, leaving less money for marketing and promotions
3. Earnings per share lagged its peers over the last seven years as they only grew by 9% annually

Darden is trading at $196.53 per share, or 17.2x forward P/E. Check out our free in-depth research report to learn more about why DRI doesn’t pass our bar.

Krispy Kreme (DNUT)

Market Cap: $580.3 million

Famous for its Original Glazed doughnuts and parent company of Insomnia Cookies, Krispy Kreme (NASDAQ: DNUT) is one of the most beloved and well-known fast-food chains in the world.

Why Should You Dump DNUT?

1. Earnings per share have dipped by 21.6% annually over the past four years, which is concerning because stock prices follow EPS over the long term
2. Cash burn makes us question whether it can achieve sustainable long-term growth
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

At $3.33 per share, Krispy Kreme trades at 15.2x forward EV-to-EBITDA. To fully understand why you should be careful with DNUT, check out our full research report (it’s free).

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