Personal Finance

Why 2017 Is the Year to Invest in Fast-Casual Stocks

Image source: Chipotle Mexican Grill.

Things didn't play out well last year for investors of most fast-casual stores.

Chipotle Mexican Grill (NYSE: CMG) , the poster child of the niche, plummeted another 21% last year. The company that made so many subsequent fast-casual IPOs possible had already taken a big hit in late 2015 as foodborne-illness outbreaks roughed up the brand.

It wasn't just Chipotle pulling up lame. Shares of Zoe's Kitchen (NYSE: ZOES) suffered a 14% hit in 2016, but if you draw the starting line at its springtime peak, it would have surrendered 42% of its value. Noodles & Co. (NASDAQ: NDLS) shed more than half of its value, plummeting 58% through 2016.

Even the few players that held up -- such as Panera Bread (NASDAQ: PNRA) with its 5% gain last year -- failed to beat the market.

Last year was one to forget for investors in fast-casual stocks. Let's go over a few reasons 2017 should be more rewarding.

The valuations are more compelling

Few will argue that Chipotle and Zoe's Kitchen are cheap, but they're certainly less expensive now. The stock is trading lower yet the restaurant counts keep inching higher. Comps at Zoe's Kitchen remain positive, and while that's not the case at Chipotle, it's clear that the burrito roller's operating at a suppressed state.

Noodles & Co. is in a funk. It has posted five consecutive quarterly losses. However, total sales keep growing. Now that the stock has shed more than half of its value, we find the stock's price-to-sales multiple also shaved by more than half.

The turnaround at Chipotle is starting

After what will ultimately be five quarters of brutal comps, Chipotle's same-store sales are finally starting to turn the corner. Comps turned positive in December, and the year-over-year comparisons will continue to be easy through 2017.

Chipotle won't make back all of the ground that its store-level sales gave up last year. You don't lose nearly a quarter of your comps and make that back the following year. However, it will be a psychological boost for investors to see comps turn positive again for the niche's bellwether.

The restaurant recession is fading away

Eatery stocks in general took a breather last summer, as foot traffic retreated at many popular chains. Analysts began calling it a restaurant recession. The thesis posed that folks were eating out less as food costs weren't rising as quickly as restaurant menu prices, given the various other expense line items ticking higher for the industry.

Comps are finally turning positive at Chipotle, but they're also remaining that way for companies such as Zoe's and Panera that have held up better during the downturn. Noodles & Co. is still in the red, but comps have declined by a mere 0.6% through the first nine months of 2016.

Restaurant stocks were out of favor until late last year, rallying as beneficiaries of the so-called Trump rally. It remains to be seen if that will play out as new pro-business policies kick in, but for now the smart money has to be siding with restaurant stocks in general and the suppressed fast-casual players in particular.

10 stocks we like better than Chipotle Mexican Grill

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Chipotle Mexican Grill wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of January 4, 2017

Rick Munarriz owns shares of Zoe's Kitchen. The Motley Fool owns shares of and recommends Chipotle Mexican Grill, Panera Bread, and Zoe's Kitchen. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More