Are more people eating out, and is the restaurant sector profiting from it? Maybe, maybe not.
But take a closer look. Investors did well from some restaurant stocks this year. McDonald's (MCD) - Get Report stock, at around $118.60, is up nearly 27% for the year to date. Wendy's (WEN) - Get Report , at around $11, is up nearly 21%.
Still, the sector might not have fared so well given this year's struggles of traditional powerhouses including Chipotle Mexican Grill (CMG) - Get Report , whose nearly 28% stock decline was heightened by several E.coli outbreaks the company is still trying to get a handle on, and Buffalo Wild Wings (BWLD) , down nearly 11% so far this year.
Take a look at the chart.
As you can see, 2015 has been a mixed bag of good and bad performances. For every DineEquity (DIN) - Get Report , operator of Applebee's and IHOP, whose stock is down nearly 17% for the year and were hit by higher labor costs and food inflation, there was a Panera Bread (PNRA) . Panera stock is up nearly 12% in 2015 thanks to its Panera 2.0 initiative that has increased consumer traffic and improved in same-store sales. TheStreet's Jim Cramer recently wrote about Panera's initiative that "the numbers are so improved that we are waiving any worry over the price to earnings multiple."
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While higher labor costs and food inflation will hurt stock prices of some restaurants, there continues to be a more optimistic outlook among restaurant operators for 2016, according to the National Restaurant Association. This is despite some of the disappointments from initial public offerings such as Shake Shack (SHAK) - Get Report , which, at around $40, is down 12% in 2015.
What restaurant stocks should you order? Here are two to consider.
Darden Restaurants (DRI) - Get Report , at around $64.60, is up over 10% for the year to date. The company, which operates Olive Garden and LongHorn Steakhouse, among others, has figured out ways to get more customers into its restaurants and have them pay more during each visit.
For fiscal 2016, ending in May, Darden expects adjusted earnings per share of $3.15 to $3.30. The low-end of the range would mark a 3.3% increase from prior EPS forecast of $3.05 to $3.20 a share. This means if Darden only meets the low end of its EPS guidance, this would translate to a year-over-year EPS increase of 23%. Based on its $3.20 forward estimates, this puts Darden's price to earnings multiple at 17 -- in line with the S&P 500.
Jim Cramer said recently he is impressed by Darden's turnaround and likes, in particular, that the company raised its 2016 outlook, announced a stock buyback for 6% of its outstanding shares and sports a 3.1% dividend. He said he'd buy it on a sizable pullback in the stock.
Darden's average analyst 12-month target of $70 suggesting 25% gains from current levels.
Wendy's, as noted, is doing well this year and should continue to do so in 2016. Its system optimization initiative, which began in 2013, is helping Wendy's reach greater profitability. Third-quarter North American same-store sales climbing 3.1% so Wendy's is showing no signs of slowing down. The stock's high target of $14.50 suggests 40% stock gains.
Why the implied confidence? Wendy's is changing how it does business. The company is focusing more on a franchise-based model from a company store-owned model, Wendy's is willing to sacrifice near-term revenue today so it can save on large overhead expenses in the future. It's a worthwhile bet, especially since profit margins at its company-owned North American stores are up 40 basis points in the third quarter. Assuming these maneuvers translates to higher profits, its 6-cent quarterly dividend, yielding 2.30% annually, will be an added bonus.
In addition, investors would do well holding on to consistent winners Starbucks (SBUX) - Get Report -- up 47% in 2015 -- and Domino's Pizza (DPZ) - Get Report -- up over 16% -- that continue to drive growth via innovations including smartphone apps and mobile payments.
But stay away from Krispy Kreme Donuts (KKD) , down 23% in 2015.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.