From fast food to fine dining, restaurants play a vital societal role. 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 has tumbled by 13% over the past six months. This performance was noticeably worse than the S&P 500’s 1.9% decline.
Despite the lackluster result, a few diamonds in the rough can produce earnings growth no matter what, and we started StockStory to help you find them. Taking that into account, here is one resilient restaurant stock pinned to our Google Maps and two we’re passing on.
Two Restaurant Stocks to Sell:
Darden (DRI)
Market Cap: $25.05 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 Do We Think Twice About DRI?
- Sizable revenue base leads to growth challenges as its 5.7% annual revenue increases over the last six years fell short of other restaurant companies
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
- Lacking pricing power results in an inferior gross margin of 21.3% that must be offset by turning more tables
Darden is trading at $214.92 per share, or 21x forward P/E. If you’re considering DRI for your portfolio, see our FREE research report to learn more.
Shake Shack (SHAK)
Market Cap: $5.08 billion
Started as a hot dog cart in New York City's Madison Square Park, Shake Shack (NYSE: SHAK) is a fast-food restaurant known for its burgers and milkshakes.
Why Does SHAK Fall Short?
- Poor expense management has led to an operating margin of 0.6% that is below the industry average
- Low free cash flow margin of 1.6% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Negative returns on capital show that some of its growth strategies have backfired
Shake Shack’s stock price of $126.17 implies a valuation ratio of 95.1x forward P/E. Check out our free in-depth research report to learn more about why SHAK doesn’t pass our bar.
One Restaurant Stock to Watch:
Yum! Brands (YUM)
Market Cap: $40.05 billion
Spun off as an independent company from PepsiCo, Yum! Brands (NYSE: YUM) is a multinational corporation that owns KFC, Pizza Hut, Taco Bell, and The Habit Burger Grill.
Why Do We Like YUM?
- Aggressive expansion of new stores reflects an offensive push to quickly grow and sell in markets where it has few or no locations
- Highly efficient business model is illustrated by its impressive 32.1% operating margin
- Robust free cash flow margin of 18.9% gives it many options for capital deployment
At $144.09 per share, Yum! Brands trades at 23.4x forward P/E. Is now the time to initiate a position? See for yourself in our full research report, it’s free.
Stocks We Like Even More
The market surged in 2024 and reached record highs after Donald Trump’s presidential victory in November, but questions about new economic policies are adding much uncertainty for 2025.
While the crowd speculates what might happen next, we’re homing in on the companies that can succeed regardless of the political or macroeconomic environment. Put yourself in the driver’s seat and build a durable portfolio by checking out our Top 9 Market-Beating Stocks. 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-small-cap company Comfort Systems (+782% five-year return). Find your next big winner with StockStory today for free.
