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Stock market battles continue here at Stock Card HQ. On today's edition of Stock Card Weekly, we are looking at three restaurant stocks at three drastically different share price points to see which one is worthy of a spot in our watchlist and ultimately will find its way into our long-term portfolios. This is the third edition of the watchlist-worthy battles.
Last two weeks, we looked at three car companies - Volkswagen, Geely, and Ferrari and three retail companies - Target, Walmart, and Stitch Fix and chose the one that we believe has the most potential to generate wealth for its investors. If you haven't read either of the previous editions, you can find them on this blog. Just scroll down a bit further.
Let's get to know today's contestants:
Note: All numbers stated are based on the last available data on 9/01/2018. If you are reading this edition at a later date, the information might be drastically different. Be smart and check your numbers.
$ McDonald's (Price to Earnings ratio: 23.7)
Recently I watched the movie 'The Founder' which is about the founder of McDonald's Corp, Ray Kroc. While he is not the actual founder of the company, what made a lasting impression on me was Ray's vision to build McDonald's as the new American church that is open 7 days a week. Every town across the country used to have a city hall with a flag, and a church. Ray wanted them to all have a McDonald's with its golden arches. And, he has delivered on the vision. Today, the restaurant chain is one of the best real estate business companies in the world, which by way of owning its real estate locations, maintains its dominance. Fast forward to the current day, the company is still worth owning, especially after the new CEO, Steve Easterbrook took over. Starting with introducing the all-day breakfast menu to revamping the McCafe experience, the company is staying relevant to the changing tastes of the customers. The picture is not all perfect though. The company still has to compete with several other restaurant chains for customers. In the recent quarterly earnings, we learned that growing the traffic to the stores remain a challenge. At 23.7 price to earnings ratio, McDonald's stock is not an expensive stock to own but not a cheap one either.
$$ Chipotle Mexican Grill (Price to Earnings ratio: 78.8)
You may not remember the food contamination incidents the restaurant chain had in 2016, but the company's stock is not yet back to its all-time high glory days. Everyone's favorite Burrito stock fell off the cliff, and it hasn't been able to recover from the fall. However, the signs of recovery are emerging. Sales growth is positive, earnings per share are positive, and the company has no long-term debt. There is also a new CEO. He comes from Taco Bell, and he knows how to recover a company back to its glory days after food contamination incidents. Afterall Taco bell has been through a similar path and has come out triumphant. CEO Brian Niccol is working on several initiatives to turn the company around. Mobile-delivery through the Chipotle app, building the company's loyalty program and testing new food items such as quesadillas and milkshakes are among such initiatives. At 78.8 price to earnings ratio, Chipotle is not a cheap stock to own, but good thing may come to those who are patient.
$$$ Shake Shack (Price to Earnings ratio: 604.4)
The first time I looked at Shake Shack's stock price I couldn't believe my eyes. You know how they say Netflix and Amazon are very expensive stocks. But, Shake Shack leaves those stocks in the dust. At 604.4, Shake Shack maybe one the most expensive stocks you may come across. Shake Shack is a relatively new burger business. The company is growing strong, with revenues increasing by 29% year over year. However, the company hasn't been profitable consistently, and the same-store sales are not growing. Shake Shack has plans to expand in the U.S. as well as globally, by increasing the number of restaurants from 162 to 450 by the year 2020. Such an expansion plan is what is driving the stock price into an overvalued range. In a way, the stock market investors are looking to find another darling to replace the empty spot Chipotle has left in their portfolios. For a restaurant chain that has to compete heavily with many other restaurants, the lack of profitability and growing sales in its current restaurant locations are serious risk factors a long-term investor cannot ignore.
Which is our watchlist-worthy pick?
Which of these fast-food stocks is as irresistible as its food? Eliminating one of the three is easy. While I have never tried Shake Shack's burger, at 604.4 price to earnings ratio, it is just too expensive to consider. The stock may even go higher in price, but it is somewhat entering "cryptocurrency" territory. The value is not correlated to the cash-generation power of the company, but instead, it is reflective of the popularity. For me, that gets into speculation territory and out of investing. Between McDonald's and Chipotle, things get a bit more down to earth. Fundamentally, these two are very different businesses. One is a global real-estate conglomerate that happens to sell burgers and fries that is loved by billions. The other one is a fast-growing burrito concept that has hit a few roadblocks. As much as I love McDonald's, I think Chipotle is the one that is worthy of being added to the watchlist. The new CEO is doing very well, and the company is still profitable. All they need is a few quarters of execution as per their plans, and the company can grow in the U.S. and then expand globally.
Hope you enjoyed this edition of Stock Card Weekly. If you are a premium member, log in to read about Stock Card team's final decision. For the rest of our community, hope you enjoyed this edition. Write back to me, or share your thoughts on our Facebook Group and let your fellow investors know which one is your watchlist-worthy winner.