This Goldman Sachs analyst says these 8 restaurant stocks fared better amid the pandemic and look poised to continue to outperform.
COVID-19 has not been kind to the restaurant industry.
The pandemic has forced temporary shutdowns for indoor dining throughout the country, spurred the rise of takeout, and has compelled many restaurants to rethink how they operate in the new COVID-19 world.
But some restaurant chains have weathered the storm better than others. Companies with geographic diversity, omnichannel platforms, and more liquidity managed to excel amid the worst pandemic in the last century.
Goldman Sachs analyst Jared Garber initiated coverage of several restaurant stocks this week with a bullish outlook, writing in a note that “large chains are positioned to benefit from the rapid digital transformation and independent restaurant challenges.”
As a whole, Garber estimates the industry lost $150 billion in 2020, a tragic blow that forced many smaller and independent restaurants to close permanently. But that means more market share is up for grabs for the restaurants that did survive, and Garber says large chains could see their share rise by 500 basis points to 25% in 2021.
Garber’s top pick in the space is Chipotle Mexican Grill (NYSE: CMG), and he added it to Goldman’s Conviction Buy list with a $1,650 price target.
Chipotle has made strides in recent years to establish a strong foundation and supply chain, while investing in its digital presence. And Garber says pandemic tailwinds are a further catalyst that will push the stock higher.
“The digital transformation brought about by COVID will allow Chipotle to leverage its digital ecosystem—strong mobile app, rapidly growing loyalty program, third-party delivery, and Chopotlane digital drive-thrus—to drive top-line growth and improving margins,” Garber wrote.
The Goldman analyst also issued Buy ratings for Domino’s Pizza (NYSE: DPZ), Olive Garden-parent Darden Restaurants (NYSE: DRI), Chili’s franchisee Brinker International (NYSE: EAT), Jack in the Box (NASDAQ: JACK), McDonald’s (NYSE: MCD), Starbucks (NASDAQ: SBUX), and Wingstop (NASDAQ: WING).
But of these, BK Asset Management’s Boris Schlossberg says there’s a trio of stocks that might be investors’ best bets.
“You really can’t go wrong with Domino’s, Mickey D’s, and Starbucks,” Schlossberg, the firm’s managing director of FX strategy. “They’re the trifecta in this space, simply because all these names have totally mastered the art of automation of the food experience, the fast-food experience, and they’ve basically disseminated all human error out of the process.”
Schlossberg argues all three names have “huge economies of scale,” which Domino’s leverages for its logistical prowess, McDonald’s employs to streamline ordering and test new menu items, and Starbucks uses via its revenue generating app.
“To me, all the movement here is very much forward,” Schlossberg said, adding that Domino’s next logical step may be an acquisition in the gourmet pizza space and keeping “the upmarket brand completely separate” while enhancing it with its technology.
“All of these players are essentially dominating this space very strongly, and because of the economies of scale and because of their perfection of the buy online, purchase in store, the BOPUS… it’s a very, very good process that I think is going to reward investors very well in the near future,” Schlossberg concluded.
Todd Gordon, founder of TradingAnalysis.com, has his eye on another stock among Goldman’s top picks.
“As much as I hate to say it, the world is changing,” Gordon said. “Food services that are embracing this touchless payment on mobile apps, the loyalty programs, digital marketing, social media channels, those are the ones who will succeed.”
Gordon agrees with Schlossberg that Starbucks is a good pick now given its strong loyalty program and more app downloads than any of its peers, but his other pick is Chipotle.
Chipotle is “a hedge fund favorite,” Gordon said, noting that the stock looks poised to break through a long-term resistance channel.
“They actually don’t even have technical resistance up to $3,000,” Gordon said. “They’re the leader, most innovative, in terms of digital marketing. They’ve secured their supply lines. Strong stock. They should recover. I’m bullish.”