My Top Picks for Restaurant Stocks

I love watching Chef Gordon Ramsay blowing a gasket in one of his many cooking shows, including Master Chef and Hell’s Kitchen.

While the outbreaks are often quite hilarious, the popularity of cooking shows has grown over the past years since we first saw Iron Chef come on air over a decade ago.

The restaurant sector is big business, and it’s set to pick up again following the recession that has generated a buying opportunity.

The chart of the Dow Jones US Restaurants & Bars Index below shows the run-up in the sector since early 2011. The chart is highlighted by several breakouts (blue horizontal lines), based on my technical analysis, and a potential buying opportunity.

Chart courtesy of www.StockCharts.com

And as the economy continues to forge ahead, the housing market drives up property wealth, and jobs growth picks up, I expect the restaurant sector to pick up steam and create a buying opportunity.

A couple of my favorite non-fast-food restaurant stocks that are a potential buying opportunity are Chipotle Mexican Grill, Inc. (NYSE/CMG) and Texas Roadhouse, Inc. (NASDAQ/TXRH).

I enjoy the Mexican-style foods at Chipotle, which for many restaurant goers is a much better alternative than eating the cheap burritos and tacos at Taco Bell.

For Chipotle, there was an excellent buying opportunity in October 2012 when the stock fell to a 52-week low of $233.82; it has since rallied 75%. (Read “Big Mac, Burritos, Fried Chicken: My Favorite Fast Food Stocks.”) At its current price, Chipotle is fairly valued, but it’s worth more of a look on weakness, as was the case in 2012.

Chart courtesy of www.StockCharts.com

If you prefer steaks and beer, a restaurant stock to consider is Texas Roadhouse. The network includes over 400 restaurants across 48 states and two countries.

If you are looking for a nice, relaxed sit-down meal, Texas Roadhouse is for you. The menu is similar to what you would find at other comparable restaurants, such as steaks, burgers, seafood, salads, and other common menu items.

Chart courtesy of www.StockCharts.com

The company is a model of consistency, reporting higher sequential revenue growth over the past 11 years, from $159.91 million in 2001 to $1.26 billion in 2012. The growth is estimated by Thomson Financial to continue into 2013 and 2014.

Texas Roadhouse has also delivered on the earnings end, reporting higher earnings growth in 10 of the last 11 years and continuing into 2013 and 2014, which could present a buying opportunity.

Other restaurant stocks that are a potential buying opportunity include The Cheesecake Factory Incorporated (NASDAQ/CAKE) and Ruths Hospitality Group, Inc. (NASDAQ/RUTH).