More than a decade ago, most diners had two options when it came to going out. A fast food meal, with low prices but equally low-quality food, was one option. The other was a more formal sit-down place, where the food was decent but the time and money involved in getting a meal was prohibitive.
To fill the void, so-called “fast casual” dining exploded in popularity and increased 550% since 1999. Places like Panera (PNRA, Financial), Chipotle (CMG, Financial) and others grew remarkably faster than any other segment of the food service industry. Traditional fast food, like McDonald’s (MCD, Financial) and Burger King (BKW, Financial), grew much slower in comparison.
If there’s one thing investors love, it’s rapid growth and the promise of massive returns. A handful of these popular restaurants went public and enjoyed some strong returns. However, that rapid growth looks like it could be petering out. For investors who missed the initial surge, this is a good time to take a look at these fast-casual dining stocks now that prices are based a little more in reality than potential.
Panera
Panera has been publicly traded since 1992 yet was consistently an underperformer until the turn of the century. If you were wise enough to invest in the sandwich and soup eatery back in 2000, you’d be enjoying a 4,700% return on investment. While dot-com stocks were crashing and burning in the early 2000s, Panera thrived and grew incredibly strong.
Panera will probably never grow in value as much as it did then, but the company has been a fairly consistent performer. Its third-quarter earnings released on Oct. 25 exceeded expectations. Sales are up this year, which bodes well for the maturing company.
Chipotle
No company represents the rise of fast-casual dining like this burrito chain. Chipotle was once owned by McDonald’s before going truly big. The food is tasty and relatively inexpensive and a big hit with diners. That combination has fueled incredible growth and happy investors — except for this past year.
A dangerous E. coli outbreak from a year ago has both damaged the company’s reputation and sales. Sales are down 22% on the year, and there are legitimate concerns whether the company can make a full recovery. Shares dropped 44% in the past year, and the latest earnings report was underwhelming. There could be value here for investors, but it’s a risky bet as Chipotle is no longer the rising star it once was.
Shake Shack
This burger eatery, which got its start at one location in Madison Park in New York City, went public in 2015. Shares doubled in less than a year yet that was the high-point for Shake Shack (SHAK). The stock has proven volatile and lost 20% of its value in 2016.
Shake Shack still has a small footprint compared to its competitors. As of March, there were fewer than 100 locations throughout the world. The sales at each location have proven strong yet even strong sales aren’t enough to convince Wall Street. The latest numbers from the company show that same-store sales growth is less than expected.
Whether Shake Shack can use its popular brand and well-regarded food to make it a great investment option remains to be seen.
The future of dining?
While some fast-casual dining options are better than others, this type of dining isn’t going away anytime soon. It seems like this segment of the industry is showing signs of maturing, which leads to slower growth. But that’s not necessarily a bad thing, as plenty of great companies in a variety of industries grow slowly and steadily.
Disclosure: I am not long any of the stocks mentioned in this article.
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