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1 Restaurant Stock with Exciting Potential and 2 to Think Twice About
From fast food to fine dining, restaurants play a vital societal role. But it’s not all sunshine and rainbows as they’re notoriously hard to run thanks to perishable ingredients, labor shortages, or volatile consumer spending. Unfortunately, these factors have spelled trouble for the industry as it has shed 9.1% over the past six months. This drop was disheartening since the S&P 500 stood firm.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. Keeping that in mind, here is one resilient restaurant stock pinned to our Google Maps and two we’re steering clear of.
Two Restaurant Stocks to Sell:
Arcos Dorados (ARCO)
Market Cap: $1.58 billion
Translating to “Golden Arches” in Spanish, Arcos Dorados (NYSE:ARCO) is the master franchisee of the McDonald's brand in Latin America and the Caribbean, responsible for its operations and growth in over 20 countries.
Why Are We Wary of ARCO?
- Lacking pricing power results in an inferior gross margin of 13.2% that must be offset by turning more tables
- Responsiveness to unforeseen market trends is restricted due to its substandard operating profitability
- Poor free cash flow margin of -0.9% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $7.80 per share, Arcos Dorados trades at 0.3x forward price-to-sales. Check out our free in-depth research report to learn more about why ARCO doesn’t pass our bar.
El Pollo Loco (LOCO)
Market Cap: $275.3 million
With a name that translates into ‘The Crazy Chicken’, El Pollo Loco (NASDAQ:LOCO) is a fast food chain known for its citrus-marinated, fire-grilled chicken recipe that hails from the coastal town of Sinaloa, Mexico.
Why Do We Pass on LOCO?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its menu offerings and dining experience
- Revenue base of $476 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 4%
El Pollo Loco’s stock price of $9.25 implies a valuation ratio of 4.2x forward EV-to-EBITDA. To fully understand why you should be careful with LOCO, check out our full research report (it’s free).
One Restaurant Stock to Buy:
Chipotle (CMG)
Market Cap: $69.35 billion
Born from a desire to offer quick meals with fresh, flavorful ingredients, Chipotle (NYSE:CMG) is a fast-food chain known for its healthy, Mexican-inspired cuisine and customizable dishes.
Why Will CMG Beat the Market?
- Fast expansion of new restaurants to reach markets with few or no locations is justified by its same-store sales growth
- Same-store sales growth averaged 6.2% over the past two years, showing it’s bringing new and repeat diners into its restaurants
- Massive revenue base of $11.49 billion makes it a household name that influences purchasing decisions
Chipotle is trading at $51.55 per share, or 39.3x forward P/E. Is now the right time to buy? See for yourself in our in-depth 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 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 176% over the last five years.
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 Kadant (+351% five-year return). Find your next big winner with StockStory today for free.