Restaurant stocks with appetizing value

Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.

What are we looking for?

Well-valued U.S. restaurant chains.

The recent takeover of Canadian icon Tim Hortons Inc. by U.S. fast food giant Burger King Worldwide Inc. has fuelled rumours of further consolidation in the restaurant sector. This week's rapid declines in the price of oil are also bullish for several sectors including airlines and those tied to consumer discretionary spending such as restaurants and retail.

The screen

We will be using Recognia Strategy Builder to search for reasonably valued U.S. restaurant stocks poised for future growth.

We begin by setting a minimum market capitalization threshold of $1-billion (U.S.) to focus on larger restaurant chains in the market. Next, we will look for companies with reasonable valuations based on their forward P/E estimates. We will consider companies with P/E ratios of 25 or less based on this year's analyst estimates.

Finally, to focus on companies with strong track records of profitability and growing earnings, we will select only stocks with five-year average annual growth rates of five per cent or more in their earnings per share (EPS).

What did we find?

Bloomin' Brands Inc. ranks first on our screen. It is one of the largest U.S. casual dining chains and operates brands such as Outback Steakhouse and Bonefish Grill. The company has strong EPS growth and has the lowest forward P/E on our screen of 15.1.

Krispy Kreme Doughnuts Inc. is the smallest company on our screen and also has the highest historical EPS growth rate. Last quarter, the company missed earnings expectations by a wide margin leading to a 15 per cent one-day selloff. The company's valuation is now fairly attractive with a forward P/E of 23.5.

Yum Brands Inc., owner of major brands such as KFC and Pizza Hut, also appears on our screen with a market cap of more than $30-billion. Yum has high exposure to emerging markets in Asia and operates in 125 countries.

Historical performance

Recognia Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 27.5 per cent annualized return compared to 12.9 per cent for the S&P 500 index.

More about Recognia

Recognia is a global leader in quantitative and technical analysis. It is accessible by more than 20 million investors and traders worldwide through leading retail online brokers. Recognia covers 85 exchanges worldwide, and analyzes 72,000 instruments daily including stocks, indexes, ETFs, currencies and futures.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia in respect of an investment in financial instruments. Investors should conduct further research before investing.