7 Restaurant Stocks to Take Off the Menu

Restaurant stocks have had a challenging couple of years now.

The U.S. was nearly at full throttle in the first half of this year, just as it was close to escaping from the pandemic. Things changed as the year went on. Now we sit on variety of conflicting economic indicators — some encouraging, other flashing warning signs.

And so, while the economy certainly is doing better than it was a year ago, it isn’t really doing as well as we hoped. This makes it difficult for service-based businesses, particularly restaurants.

Not only are they experiencing higher food costs, but customers aren’t returning like in the old days. Add to this the staffing issues that all service industries face, and some restaurant stocks are facing a more difficult recovery.

Growth-driven companies have had to halt their expansion. Others have been overextended.

You can either stay away from or sell the following restaurant stocks.

Carrols Restaurant Group (NASDAQ:TAST)
Fiesta Restaurant Group (NASDAQ:FRGI)
BurgerFi International (NASDAQ:BFI)
Aramark (NYSE:ARMK)
El Pollo Loco Holdings (NASDAQ:LOCO)
Yum China Holdings (NYSE:YUMC)
Muscle Maker (NASDAQ:GRIL)

Restaurant Stocks to Avoid: Carrols Restaurant Group (TAST)

Source: Savvapanf Photo/ShutterStock.com

Since 1960, TAST has been in fast food business. It was initially known as Carrols Drive-In Restaurants. It had more than 150 restaurants throughout New York and the Northeast at its peak.

It signed a conversion agreement in 1975 with Burger King, and began converting its Carrols brand properties to Burger Kings.

Between 1980 and now, TAST continued to add properties, including Popeye’s franchises, around the U.S. Now TAST has more than 1000 restaurants … for now.

TAST, a large franchise operation, closed many of its restaurants during the pandemic. This was because their losses were becoming unsustainable, especially for publicly traded businesses. And things still aren’t headed in the right direction quickly.

TAST stock lost 39% over the past three months. This is a huge loss for a stock that has a market cap of $196 million. The stock’s earnings are negative, and its hopes of regaining its momentum are stuck in pandemic mode.

My Portfolio Grader rates this stock as F.

Fiesta Restaurant Group (FRGI)

A photo of a Pollo Tropical restaurant, owned by Fiesta Restaurant Group (FRGI).

Source: Felix Mizioznikov/ShutterStock.com

The past few months have been anything but a party for FRGI. This Texas-based restaurant stock focuses on Tex-Mex food through two distinct divisions — Pollo Tropical and Taco Cabana.

FRGI sold its Taco Cabana division, along with its 160+ restaurants, to a privately-held California-based restaurant company in mid-August. It still has 140 Pollo Tropical restaurants.

It has sold more than half its operations. That’s not a good sign. While it does help to bring in cash, it comes at the cost of one key component of the operation.

FRGI stock has a $292 million market cap but it also has a P/E of more than 100. That’s very pricey for a struggling restaurant caught in another wave of the pandemic when expansion isn’t likely.

My Portfolio Grader gives this stock a D rating.

Restaurant Stocks to Avoid: BurgerFi International (BFI)

A photo of the exterior of a Burgerfi (BFI) restaurant.

Source: YES Market Media/Shutterstock.com

Launched in southern Florida in 2011, BFI joined the burger wars on the upscale side. It now has more than 120 locations in target markets across the U.S.

Granted, that’s not a slew of properties, but its focus on grass-fed beef, free-range chickens and vegetarian options put it into more of the fast casual restaurant sector than fast-food burger chain.

It’s a great idea. The problem is that the first thing you see on the webpage is a recruitment worker pop-up. That’s the big challenge right now. Franchisees need to attract people behind the counters, as well as those in the dining area. And since BFI doesn’t do the kind of drive-thru burger scene, it’s tough. Deliveries are also difficult on restaurant margins, which are already thin.

BFI stock has a $163 million market cap and has suffered a 34% loss in the past year. This stock is not a good investment.

My Portfolio Grader gives this stock a D rating.

Aramark (ARMK)

A photo of a building with the Aramark (ARMK) logo on it over the door.

Source: Jonathan Weiss/ShutterStock.com

There are a couple large-cap operations in this list, and ARMK is one of them. This restaurant stock has a market cap of more than $8 billion and is well-diversified. It supplies food, services and uniforms to 19 countries.

Although size is beneficial in good times, leverage also works in the opposite direction. When the world goes into a remote work and school environment and your company supplies schools, universities, and office campuses, it’s in for a big rough patch.

As the world begins to open again, ARMK is stepping out of this hole. Students being back in school helps. It is good for the economy to have more people working in offices. ARMK stock has fallen 12% over the past three months. Although the company expects Q4 to be better than Q3, it may be more optimistic than reality.

My Portfolio Grader gives this stock a D rating.

Restaurant Stocks to Avoid: El Pollo Loco Holdings (LOCO)

El Pollo Loco restaurant exterior and sign

Source: Ken Wolter / Shutterstock.com

Launched in Mexico in 1975, LOCO became an American franchise operation in 1980. It’s now closing in on 500 restaurants around the U.S.

LOCO is a notable stock in the restaurant sector with positive earnings and a decent ratio of P/E. Its challenge lies in the fact that MexiCal and TexMex sectors are extremely popular and that competition is growing.

There are many mom-and-pop businesses that are stealing market share, making it difficult to expand the franchise. As a franchise business it isn’t as affected by store revenue, but expansion is the challenge.

LOCO stock has lost around 4% year to date, which isn’t that bad compared to others. But growth is the real issue.

My Portfolio Grader gives this stock a D rating.

Yum China Holdings (YUMC)

A banner for Yum China (YUMC) decorates the New York Stock Exchange.

Source: rblfmr / Shutterstock.com

With a $24 billion market cap, this is easily the largest restaurant stock of the bunch. But given the list it’s a part of, that’s not a significant achievement.

YUMC is the China-based businesses of YUM! Brands (NYSE:YUM), which owns KFC, Pizza Hut, Taco Bell and other brands. YUMC faces two significant challenges, both in the short and long-term.

The reinvigorated pandemic is the first. This is not to mention the challenge of getting customers and workers into its properties. Although delivery is certainly a benefit, as I have already mentioned, delivery companies charge fees which eat into margins as well as making the food more costly for customers. These brands are price-inelastic, so they can hinder growth.

Second, China is still not seeing eye to eye with the U.S. And that means U.S. brands aren’t as popular as they once were. A more “Buy China” spirit means overseas brands suffer. YUMC suffers.

YUMC is bouncing around even on the year and the dark clouds aren’t clearing.

My Portfolio Grader gives this stock a D rating.

Restaurant Stocks to Avoid: Muscle Maker (GRIL)

Top view of woman eating healthy food while sitting in a gym

Source: Shutterstock

“Great food with your health in mind” is the tag line for Muscle Maker Grill, a health-focused fast-casual chain that started in Texas but has been growing its franchises briskly in recent years. It also added Pokemoto, a poke-restaurant to its portfolio this year.

There’s an old Texas saying that it’s not the size of the dog in the fight, it’s the size of the fight in the dog. GRIL’s market cap is just $18 million. That’s a lot of fight, considering that the stock has lost 40% of its value over the years.

GRIL has a unique model. It seems to be expanding in solid markets that favor its healthy fast-casual food approach. This is a difficult time to make a name for yourself in a highly competitive sector with razor-thin margins. Revisit this one a couple quarters from now and see how it’s faring.

My Portfolio Grader gives this stock a D rating.

Louis Navellier does not have any positions in the stocks mentioned in this article as of the date of publication. Louis Navellier doesn’t have any other positions, directly or indirectly, in the securities mentioned.

 The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.

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