Services

This Industry May Be Set to Explode Higher This Summer: 4 Stocks to Buy Now

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If you are like most Americans, your patience with the COVID-19 pandemic and all the accompanying restrictions, lockdowns and rules is probably wearing thin. The good news is that many states are reopening, mask mandates are being dropped in some places, people are traveling, and life in many places is returning to normal, albeit a very slow return.
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Some industries benefited big time from the evacuation from businesses and the workplace to home, but many suffered terribly. The restaurant industry was one of the hardest hit. Fortunately, the tide is turning. A new Baird report shows that almost all the metrics in the restaurant industry are turning around:

We polled executives at private restaurant chains covering roughly $15 billion in annualized sales about their same-store sales for last week. Respondents indicated comps in the week ended on or near April 11 were +76% (against low year-ago comparisons), above +69% in the first week of April. The week-to-week change appeared to stem mainly from a swing in the impacts from Easter timing (April 4 this year vs. April 12 last year), which was a net positive in the most recent week after being a net negative the prior week (particularly for limited service concepts, many of which are closed on Easter day).


This improvement should continue as the vaccine rollout increases and consumers start returning to their favorite spots. Add in the fact that many restaurant chains had adapted to focus on takeout, delivery and other pandemic-predicated operating arrangements, so having a return of customers to the locations to dine-in can only be a bigger positive.

We screened the Baird research universe for stocks rated Overweight. These four look like great ideas that could really take off as summer travel and vacations boost business. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Chipotle Mexican Grill

The remains a favorite destination for those looking to eat out, and the stock is a top pick across Wall Street. Chipotle Mexican Grill Inc. (NYSE: CMG) operates more than 2,400 fast-casual Mexican restaurants offering freshly made burritos, tacos, burrito bowls and salads.

It is 100% company-operated and runs average unit volumes much higher than peers. The company has established a strong foundation with a focus on operations, supply chain and marketing over the past two years. The digital transformation brought about by the pandemic allows Chipotle to leverage its digital ecosystem, the strong mobile app, a rapidly growing loyalty program with over 20 million members in just two years, and third-party delivery and digital drive-thrus continue to drive top-line growth and improving margins.

The Baird price target for the shares is $1,750, while the Wall Street consensus target is $1,661.08. Monday’s closing price for Chipotle Mexican Grill stock was $1,550.01 a share.

Darden Restaurants

The return to sit-down dining in restaurant locations will be massive for this industry leader. Darden Restaurants Inc. (NYSE: DRI) owns and operates full-service restaurants in the United States and Canada.

As of May 31, 2020, the company owned and operated approximately 1,804 restaurants, which included 868 under the Olive Garden, 522 under the LongHorn Steakhouse, 165 under the Cheddar’s Scratch Kitchen, 81 under the Yard House, 60 under the Capital Grille, 44 under the Seasons 52, 41 under the Bahama Breeze and 23 under the Eddie V’s Prime Seafood brands.


In another good sign for shareholders, Darden in late March declared a quarterly disbursement of $0.88 a share, up from $0.37.

Shareholders now receive a 1.41% dividend. Baird has a $152 price target, but the slightly higher consensus target is $156.04. Darden Restaurants stock closed at $145.96 on Monday.
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McDonald’s

The fast-food giant continues to revamp both stores and the menu, and it is a solid pick for more conservative accounts. McDonald’s Corp. (NYSE: MCD) is the world’s leading global food-service retailer with over 39,000 locations serving approximately 69 million customers in over 100 countries each day. More than 80% of McDonald’s restaurants worldwide are owned and operated by independent local businesspersons.

The company has built a product pipeline, including a new chicken sandwich, a McPlant line and follow-on celebrity promos. Baird feels the key driver of the McDonald’s story will shift to a technology scale that competitors will struggle to replicate. This tech evolution is supporting a wave of consolidation, while it creates pressure on small and mid-tier players.

In addition, many on Wall Street believe that the company will benefit broadly from economic reopenings in 2021, and the company’s investments in technology, a renewed marketing strategy, loyalty and menu innovation will drive share gains in the industry.

Shareholders receive a 2.21% dividend. The $242 Baird price target compares with a $244.56 consensus target. McDonald’s stock closed on Monday at $231.81.

Texas Roadhouse

Like many restaurants, Texas Roadhouse Inc. (NASDAQ: TXRH) offers takeout service, but with sit-down customers returning, it is also poised to see solid growth. The company is a full-service, casual dining restaurant chain that offers assorted seasoned and aged steaks hand cut daily on the premises and cooked to order over open gas-fired grills.

Texas Roadhouse operates restaurants under the Texas Roadhouse and Aspen Creek names. The firm also offers its guests a selection of ribs, fish, seafood, chicken, pork chops, pulled pork and vegetable plates, and an assortment of hamburgers, salads and sandwiches. It also provides supervisory and administrative services for other licensed and franchised restaurants.

Baird has set a $101 price target. The consensus target is $92.17, and the final Texas Roadhouse stock trade on Monday was at $97.83.


While these stocks have had a nice run off the pandemic-driven lows, it is important to remember that comparisons starting in the second quarter are going to be much lower due to shutdowns in 2020. That should provide a nice tailwind for these industry leaders. It also should lead Wall Street analysts to continue raising price targets.

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