4 Ways To Diversify Your Portfolio With Fast Food

Includes: CMG, MCD, PNRA, YUM
by: Jefferson Starship

Over the last few years, the leaders in the fast food industry have been on a quiet tear in terms of price appreciation. Fast food stocks have been able to appreciate, despite the rising costs of beef and other commodities, as well as the rise in labor costs. One sector-wide argument that could be made is that during the recession, consumers traded down from traditional restaurants to cheaper alternatives and have continued to do so as America has climbed out of the recession.

What's interesting about the fast food sector is that it has not been difficult to choose the stocks that have outperformed the rest of the industry. These have been the bigger companies with large market capitalization and the best menu offerings in terms of either price or taste. For instance, McDonald's (NYSE:MCD), the largest fast food company by leaps and bounds, has risen 50% in price over the last two years. It's not like investors didn't know that McDonald's is one the best fast food stocks out there and one that can continue to rake up earnings quarter after quarter, so the fact that it was trading in the mid-$60s in 2010 is befuddling.

Another proposition that this list of four fast food stocks seeks to support is that these stocks can fill several different investment needs. Every portfolio should be invested in how people eat, whether it be in commodities, stable traditional restaurants [like Brinker (NYSE:EAT)], or hot grocery stores [like Whole Foods (NASDAQ:WFM)]. The reasoning is that people need to eat. The reasoning for picking a fast food stock is that people are lazy and will eat out.

McDonald's: Long-term dividend appreciation

McDonald's has several outstanding features that make it an incredible investment. As mentioned, there is the company's recent price history, but more importantly, McDonald's has been increasing its dividend annually for 35 years. The stock is currently yielding 2.9% and the price would need to drop to around $93 for it to cross the 3% mark.

McDonald's represents the type of stock that an investor can purchase and maintain with minimal effort and you can bet that McDonald's will be around down the road. That's part of the reason why so many funds own it. Even McDonald's recent announcement that its sales did not meet expectations only dropped the stock 4%, making it more enticing to purchase now than a week ago. McDonald's also has a strong international presence, and its restaurants can be found across the globe.

Chipotle Mexican Grille (NYSE:CMG): Speculative growth

This week Chipotle crossed the $400 mark, only two years after trading at $115. Many would say that this is unwarranted and that Chipotle is a short prospect, but they have been saying that for two years. I would argue that even at this level Chipotle is a strong investment. The company's ownership has been forward with investors, telling them how many stores they plan to open each year, and with less than 1,300 stores, there is plenty of market space left. Investors should note that the number of store openings is limited by the fact that Chipotle does not franchise, but this is actually a plus for the company. Stores are only opened after extensive market research shows that the location will support a burrito restaurant with high prices. This procedure has clearly worked so far.

Yum! Brands (NYSE:YUM): International growth

Yum is well established in the United States, but unfortunately the American stores are not doing so well (which is odd considering Taco Bell is the best fast food restaurant available stateside). Fortunately, Yum is a huge hit overseas. Chinese consumers have taken a liking to Kentucky Fried Chicken, and Pizza Huts are popping up all over India. This has taken Yum from $37 two years ago to an all-time high of $68 today. The price appreciation has also moved Yum into second place for the highest market cap in the industry, while still being less than a third of McDonald's. Investing in China may not be as hot now as it was a year ago, but Yum remains one of the best ways to do it.

Panera Bread Company (NASDAQ:PNRA): Speculative growth

Panera has not increased as much as Chipotle over the last two years, but it has doubled in price from $80 to $160; and like Chipotle and Yum, Panera is at an all-time high. Unlike Chipotle, Panera does franchise its restaurants and has proven that this can work as well. Obviously, franchising reduces the risks on the company, but also reduces the reward.

What tells investors that Panera still makes for a quality purchase is its strong balance sheet. Panera has no debt, and $220 million in cash sitting around. What the company does with this cash is anyone's guess at this point, but having it is never a bad thing. Panera also boasts a strong menu that consumers seem to appreciate. Their meals are not any lower in calories than their fast food equivalents, but they are fresh and not fried, which is in line with America's preference for healthy eating.

As stated, the intent of this list was to show that premier fast food stocks can fit into different investing objectives. Whether you are looking for a drip-worthy dividend payer, an international play, or a more speculative pick, there is a quality fast food stock available.

Disclosure: I am long MCD, YUM.

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