Truly Delicious Stocks

By Glenn Curtis | May 13, 2010 AAA

With people feeling more financially secure than they did a year ago, the restaurant space is looking extremely attractive. We'll look at some tasty opportunities within the fast food segment.

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Which is More Palatable, Fast Food or Casual Dining?
An increase in spending should bode well for restaurants of all shapes and sizes, including those in the high end category. But don't think that fast food stocks should be avoided because they are likely to shine too.

Why fast food? While the economy is getting better, many Americans are still concerned about job stability and the big hit that their pension and college savings took over the last few years, so they are likely to try to stretch their spending as far as possible. Fast food chains offer the value that people are still looking for. Not only are they so convenient, but they offer tasty food that kids adore at very low prices, a trifecta of sorts. Among my top picks in the group are McDonald's (NYSE:MCD) and Yum! Brands (NYSE:YUM).

The Big MCD
McDonald's comes to my mind because it has continued to turn in good financial results and earlier this week it reported that its comps in the month of April were up a healthy 4.9%. Interestingly, the press release indicates that in the same month last year comps were up a hefty 6.9%. On the earnings front, McDonald's has a lot to be proud of too. In spite of the sluggish economy and intense competition on a number of fronts, the company has exceeded expectations three quarters straight. I also think that the $4.52 a share that analysts are expecting this year can be beat thanks to its push in coffees, its revamped stores in many markets and its continued low prices.

In terms of fast food, Yum! should not be overlooked. It has been consistently blowing the doors off of Wall Street estimates, and the company has the potential to grow its operations overseas and to grow its popularity and store base in America in the years to come. Known for its Taco Bell, and Pizza Hut chains, it should benefit from hungry yet cost conscious consumers.

What About The Sit Down Chains?
While fast food is my personal preference when it comes to investing, Darden Restaurants (NYSE:DRI), known for LongHorn and Red Lobster has been doing well as evidenced by the strength in its share price. At 15.2 times this year's estimate, it is also reasonably priced. Plus as families start spending again, this pie is big enough that it can show some nice bottom line growth. Wall Street expects the company to earn $2.93 a share this year and $3.28 per share next year. Finally, Brinker (NYSE:EAT), known for its Chili's restaurants deserves to be mentioned. Based upon the $1.24 and $1.44 a share estimates that are out there for this year and next respectively, I thinks that the stock could head into the low $20s.

Bottom Line
Restaurants of varying shapes and sizes can do well as the economy improves with time. But among my favorite types of chains right now are fast food chains. Both McDonald's and Yum look savory at their current prices. (For more, check out Sinking Your Teeth Into Restaurant Stocks.)

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