Wall Street Loves Lunch Stocks: Why These Fast Casual Chains Are Outperforming Nvidia - Sun and Planets Spirituality AYINRIN
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Topline
Lunch
is the most important meal of the day for investors in 2024 as shares
of fast casual restaurant chains deliver market-beating returns,
highlighted Friday by Sweetgreen stock’s 34% explosion.
Key Facts
•
Sweetgreen’s
share price rose to its highest level since March 2022 on the back of
its above-expectations quarterly earnings report.
•
That
makes the salad hawker the seventh-best performer of any of the
companies listed on the Russell 3000 index, which covers the 3,000
largest American stocks, encompassing about 96% of the stock market by
market capitalization.
•
It’s
the latest evidence of the “strong fast casual backdrop,” according to
TD Cowen analyst Andrew M. Charles, evidenced by the ludicrous
performance across the category.
•
Sweetgreen (shares up 185% year-to-date, market capitalization of $4 billion), Mediterranean bowl pedlar Cava (93%, $9 billion), hamburger maker Shake Shack (41%, $4 billion), burrito behemoth Chipotle (44%, $89 billion) and chicken wing king Wingstop (55%, $11 billion) have all easily surpassed the S&P 500’s 10% return so far this year.
•
Shares of Cava, Chipotle and Wingstop each hit all-time highs Friday.
•
Sweetgreen’s
and Cava’s more than 100% returns outpace even the nearly 90% gain from
artificial intelligence darling Nvidia, the best-performing company
valued at over $100 billion
Surprising Fact
It’s
actually been a challenging year for stocks of legacy fast food chains,
as shares of McDonald’s (-7%), Burger King parent Restaurant Brands
International (-5%) and Wendy’s (-2%) are all solidly in the red in
2024, with Starbucks stock’s 19% spill further proving it’s not all
sunshine for chain stocks.
Why Is The Market Shifting Away From Old-School Cheeseburgers And Into Salads And Grain Bowls?
Investors
are quite literally tightening their belts and focusing on the strong
profit margins offered by fast casual locations. The five newer
entrants’ 18% to 26% first-quarter restaurant margins compare favorably
to the 18% and 15% respective margins scored by McDonald’s and Wendy’s,
helping to justify how McDonald’s trades at roughly twice the valuation
of Chipotle despite generating six times more gross profits and how
Wendy’s trades at roughly the same valuation as Sweetgreen despite
bringing in three times more revenue during the first quarter.
Investors’ strong appetite for Cava and Sweetgreen—other than the two
chains’ Wall Street locations sitting just two blocks away from the New
York Stock Exchange—stems from the companies’ potential to rapidly
expand their footprint while still growing at a healthy pace. Analysts
forecast Cava and Sweetgreen’s same-store sales to improve by wider
margins than McDonald’s in each year through 2027.
Contra
Sweetgreen
has yet to turn a profit in its 10 quarters as a public company, and
consensus analyst estimates don’t expect that to change through at least
2026, according to FactSet data. Yet Sweetgreen’s “compelling long-term
unit growth story” comes partially from the “continued overall growth
of the fast casual segment,” according to RBC Capital Market’s Logan
Reich.
Key Background
Cava
is the freshest fast casual entrant to the public market, with its
stock booming 88% since its June initial public offering, though, unlike
Sweetgreen, it did turn a modest $13 million net profit in 2023.
Chipotle is among the most well-known stock market success stories this
millennium, as its stock’s 7,200% gain from its 2006 IPO is about 14
times greater than the S&P’s 490% return, including reinvested
dividends.
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