The Smart Money Guide to Restaurant Stocks

August 26, 2017 04:14 PM

Smart traders follow managers and analysts with a proven track record of success, which is why it is good to know what a hedge fund managers’ three favorite restaurant stocks are. Following the smart money can provide an interesting insight into how top fund managers perceive a stock, particularly when you factor in a hedge fund’s advanced research capabilities.

We scoured TipRanks, a financial accountability engine that tracks the market activity on more than 5,000 stocks, to find three restaurant stocks that have a strong confidence signal from both fund managers and a “Strong Buy” consensus rating from Wall Street analysts. We can use this double-pronged approach to find the most compelling investment opportunities. Now let’s explore the top three fund stocks.

Starbucks Corp (SBUX)
Fund managers are snapping up stocks in this coffee chain leader. In the last quarter, fund managers increased their SBUX holdings by 9.8 million shares. Encouragingly, fund guru Frank Sands is bullish on Starbucks’ outlook. Forms filed with the Securities and Exchange Commission (SEC) reveal that his $31 billion Sands Capital Management fund has just initiated a new position in SBUX with one of the stock’s largest positions valued at more than $559 million.

Analysts also are optimistic on the outlook of the Unicorn Frappuccino creator. Last month, Oppenheimer called SBUX one of its two top names in the consumer discretionary sector: “Within the Restaurants segment of the group, SBUX is on the cusp of an important breakout above $64 that by our measurement would target a move toward $76.” The firm added, “We think the stock is just getting going in relative terms as well.”

Overall, Starbucks has a “strong buy” analyst consensus rating with 15 buy and 3 hold ratings published on the stock in the last three months. Meanwhile, the 12-month average analyst price target of $66.50 translates into significant upside of more than 14% from the current share price.

The one potential fly in the coffee, is that that TipRanks’ Inside Confidence Signal is negative based on four transactions by two insiders during the last three months.

McDonald’s Corp. (MCD)
The world’s most famous burger maker also has a very positive hedge fund confidence signal. Converts to the cause include George Soros, Louis Moore Bacon and Andrew Law, who all initiated positions in the stock. Joel Greenblatt of Gotham Asset Management also ramped up the fund’s MCD holding by 130% to $47 million.

And even with MCD shares up 25% since the beginning of the year, the street is still predicting further upside for the stock. Most notably, top Cowen & Co. analyst Andrew Charles upgraded McDonald’s in mid-June with a very confident $180 price target up from just $142.

According to Charles, McDonald’s has done a “great job” of increasing its value items and introducing new and simple menu options during the last two years. As a result, the value perception consumers hold of MCDs versus other food chains has been improving since January.

Like Starbucks, the stock has a “strong buy” analyst consensus rating with 17 buy and 4 hold ratings in the last three months. We can also see that the price targets are increasing, with three bullish $175 price targets published in the last three weeks. The stock is currently trading at $153.

Red Robin Gourmet (RRGB)
This casual burger dining restaurant and McDonald’s rival also has the seal of approval from hedge fund managers. Big-name fund managers such as Terrence Hogan, Scott Kapnick and Chuck Royce have all established positions in the stock, with only Jeff Auxier decreasing his position in the last quarter.

In fact, RRGB has just been named as a top pick for the second half of 2017 by Maxim Group’s Stephen Anderson, who says that the stock’s turnaround story is gaining traction, which he attributes to the introduction of online ordering. The ability to order online has led to an acceleration in off-premise ordering, an increase in ticket sizes and a corresponding decrease in operating expenses, says Anderson.

“We maintain our $80 price target as we say incremental same-restaurant sales improvement, margin expansion opportunities and a renewed focus on shareholder returns make this a turnaround story,” Anderson concludes. The $80 price target represents a 15% upside from the current share price.

3 Stocks to Drop
If we flip over to look at the restaurant stocks funds are selling the results are: Yum! Brands Inc. (YUM), Chipotle (CMG) and Buffalo Wild Wings (BWLD). Chipotle and Buffalo Wild Wings also have a poor outlook from analysts with a “hold” analyst consensus rating.

The street and the smart money diverge on YUM, owner of KFC and Pizza Hut, which has a “moderate buy” top analyst consensus rating (downgraded from “strong buy in mid-July). On June 20, Oppenheimer analyst Brian Bittner pointed out that “the unit growth opportunity outside the United Statres [for YUM] is massive.” However, the 12-month average analyst price target for YUM of $74.17 stands just 1.12% above the current share price, suggesting that the investment opportunity to be found here is rather limited.

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