The Smart Money's Best Restaurant Plays

by: Insider Monkey

By Jake Mann

The restaurant industry has returned just 3% over the past year, and while some retail investors may choose to avoid these companies altogether, there's a better, underappreciated way to find winners in this space. Our research has proven that hedge funds and insiders - the sum of which fit our classification of the "smart money" - are very skilled at outperforming the market (see the details).

With that in mind, it's crucial to determine which companies in the restaurant industry are loved by both of these groups. To classify, the stocks must have at least one insider purchase in the last 90 days; then, they are ranked in order of hedge fund consensus according to the latest full round of 13F filings from the SEC. Let's go through the top five, starting with the No. 1 pick.

Of the 400-plus hedge funds we track, McDonald's (NYSE:MCD) garners interest from 44 different money managers, including Ken Fisher (see full portfolio), Jim Simons and Boykin Curry. Since one high-level executive purchased a modest amount of the company in early November last year, shares of McDonald's have risen 8.1%. A dividend yield of 3.2% means that this stock is more attractive than four-fifths of its peers in the restaurant industry (at least to income investors), and value-seekers can take solace in the fact that MCD's earnings trade at a 13% discount to the industry average.

Yum! Brands (NYSE:YUM), meanwhile, has interest from 30 of the hedgies we track, and has also seen one insider buy in the past 90 days. Generally speaking, Yum has been a poor investment no matter how one slices the dataset, as it is flat over the past 12 months and slightly in the red year-to-date.

It's worth noting that Director Robert Walter's purchase of YUM shares occurred last week, and in the time since, shares have risen 4.3%; this purchase came one day after Yum's Q4 earnings release on February 5. The company slightly beat the Street's EPS estimates, though it does expect to see an earnings declination this year. Still, analysts' average price target predicts a 3% upside is possible, and a trailing P/E of 19x indicates that shares are slightly cheaper than their industry's average of 20.6x.

Brinker International (NYSE:EAT) has half the hedge fund interest of Yum, but its stock price has performed far better year-to-date. Brinker is already up 6.7% since the start of 2013, after meeting analysts' top and bottom line consensuses in its latest quarterly report. Some of this stock's most committed hedge fund managers include David Dreman, Israel Englander and Ken Griffin. At a mere 12.6 times forward earnings and 0.8 times sales, Brinker sets up as a great value play, and a dividend yield near 2.4% is a nice security blanket.

Cracker Barrel Old Country Store (NASDAQ:CBRL) sits at fourth on our list, and 13 of the funds we track are bullish on the home-style restaurant company's prospects. Key executive James Myers bought 7,500 shares in late November, and in the time since, CBRL shares have gained 3.3%. Like McDonald's, Cracker Barrel is one of the few restaurant companies to pay a dividend yield above the 3% mark, which is enough of a reason to gain the smart money's support. Unlike McDonald's, Wall Street is decidedly more optimistic on Cracker Barrel's price target, predicting an upside of more than 10% - twice the appreciation that's expected of its larger peer.

Last but certainly not least, Jack in the Box (NASDAQ:JACK) rounds out this list with one insider purchase over the past 90 days and interest from 11 of the hedge funds we track. Jack in the Box has already appreciated more than 5% year-to-date, as investors are anticipating a rather boisterous performance over the next two years. After finishing FY2012 with earnings of $1.20 per share-slightly below the Street's $1.25 consensus - the sell-side expects the company to finish FY2014 with an EPS of $1.96. That's an average annual growth of more than 30% over the next two years, and a PEG of 1.59 indicates that Mr. Market hasn't outpaced reality just yet.

There are obvious reasons to like each of these stocks, and with support from insiders and hedge funds, it's difficult not to be bullish.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article is written by Insider Monkey's writer, Jake Mann, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.

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