From fast food to fine dining, restaurants play a vital societal role. But the side dish is that they’re quite difficult to operate because high inventory and labor costs generally lead to thin margins at the store level. This leaves little room for error if demand dries up, and it seems like the market has some reservations as the industry has tumbled by 5.6% over the past six months. This drop is a noticeable divergence from the S&P 500’s 11% return.
The elite companies can churn out earnings growth under any circumstance, however, and our mission at StockStory is to help you find them. Keeping that in mind, here are two restaurant stocks we think can generate sustainable market-beating returns and one that may face trouble.
One Restaurant Stock to Sell:
Darden (DRI)
Market Cap: $22.71 billion
Founded in 1968 as Red Lobster, Darden (NYSE: DRI) is a leading American restaurant company that owns and operates a portfolio of popular restaurant brands.
Why Are We Hesitant About DRI?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 6.1% for the last seven years
- Gross margin of 21.8% reflects the bad unit economics inherent in most restaurant businesses
- Earnings per share lagged its peers over the last seven years as they only grew by 9% annually
Darden’s stock price of $198.24 implies a valuation ratio of 17.4x forward P/E. Check out our free in-depth research report to learn more about why DRI doesn’t pass our bar.
Two Restaurant Stocks to Watch:
McDonald's (MCD)
Market Cap: $194.2 billion
With nicknames spanning Mickey D's in the U.S. to Makku in Japan, McDonald’s (NYSE: MCD) is a fast-food behemoth known for its convenience and broken ice cream machines.
Why Are We Positive on MCD?
- Fast expansion of new restaurants indicates an aggressive approach to attacking untapped market opportunities
- Highly-profitable franchise model results in strong unit economics and a best-in-class gross margin of 57.1%
- Robust free cash flow margin of 25.9% gives it many options for capital deployment
McDonald's is trading at $274.11 per share, or 20.9x forward P/E. Is now a good time to buy? See for yourself in our in-depth research report, it’s free.
CAVA (CAVA)
Market Cap: $8.31 billion
Starting from a single Washington, D.C. location, CAVA (NYSE: CAVA) operates a fast-casual restaurant chain offering customizable Mediterranean-inspired dishes.
Why Do We Watch CAVA?
- Aggressive strategy of rolling out new restaurants to gobble up whitespace is prudent given its same-store sales growth
- Same-store sales growth averaged 9.8% over the past two years, showing it’s bringing new and repeat diners into its restaurants
- Market share will likely rise over the next 12 months as its expected revenue growth of 23.8% is robust
At $70.61 per share, CAVA trades at 118.4x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
High-Quality Stocks for All Market Conditions
ALSO WORTH WATCHING: Top 5 Momentum Stocks. The best time to own a great stock is when the market is finally noticing it. These aren’t just high-quality businesses. Something is happening with them right now. Elite fundamentals meet near-term momentum — both boxes checked at the same time.
Find out which stocks our AI platform is flagging this week. See this week’s Strong Momentum stocks — FREE. Get Our Strong Momentum Stocks for Free HERE.
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+354% five-year return). Find your next big winner with StockStory today.
