5 Restaurant Stocks to Add to Your Portfolio as Sales Recover in July – August 27, 2024

The U.S. restaurant industry has experienced solid growth over the past two years despite pricing pressures, rising wages and food costs. This year, growth has slowed somewhat, but the industry has still put in a lot of effort to maintain its position.

Restaurant sales have increased in recent months, benefiting a large number of restaurant brands, such as El Pollo Loco Holdings, Inc. (LOCAL – Free report),Meritage Hospitality Group Inc. (MHGU – Free report), Potbelly Corporation (PBPB – Free report), Texas Roadhouse, Inc. (TXRH – Free report) and Wing stop (WING – Free report) that have experienced positive earnings estimate revisions as well as a favorable Zacks Rank.

Restaurant sales increase due to easing price pressure

The Commerce Department reported earlier this month that sales at U.S. bars and restaurants totaled $97.01 billion in July, up 0.4 percent from June’s $96.6 billion. Compared to a year ago, restaurant sales in July rose 3.4 percent.

Inflation fell sharply in the last quarter and price pressures have eased. As a result, consumers have been spending more recently. This has led to a rebound in sales after a brief slowdown in recent months.

However, the industry still faces several challenges. The restaurant industry grew 3.3% in 2023, while it has grown 1.1% year to date. The broader market index, the S&P 500, has instead risen 29.3% and 18.8% over the same period.

Higher menu prices have been one of the biggest challenges to sales growth. In addition, rising costs are weighing on profit margins. Higher pre-opening costs, higher marketing costs and expenses related to sales-driven activities are putting pressure on restaurant margins.

However, restaurant owners are trying to overcome these hurdles by relying on digital innovations, revenue-generating strategies, and cost-saving measures. They often partner with delivery services and digital platforms to increase their sales.

The restaurant industry is likely to see a boost once the Fed begins its rate cuts, which will lower borrowing costs. This should reduce operating costs and increase profit margins.

5 top restaurant stocks with promising growth

We’ve narrowed our search to five restaurant stocks that have solid growth potential for the remainder of 2024 and have seen positive earnings estimate revisions over the past 60 days. Each of our picks has either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

El Pollo Loco Holdings, Inc.

El Pollo Loco Holdings, Inc. develops, franchises and, through its subsidiary, operates quick service restaurants under the El Pollo Loco name. LOCO specializes in flame-grilled chicken in a variety of modern, Mexican-inspired entrees, including specialty chicken burritos, chicken quesadillas, chicken tortilla soup, pollo bowls and pollo salads.

El Pollo Loco Holdings’ expected earnings growth rate for the current year is 12.7%. The Zacks Consensus Estimate for its current year earnings has improved 12.7% over the past 60 days. LOCO currently has a Zacks Rank #2.