The August pullback in the stock market has created a number of buying opportunities for long-term investors. From retail to chipmakers, from the firms that pull oil out of the ground to the companies that refine them, investors have the chance to buy great companies on the dip.
But there’s one sector that took a few hits this month that now has great short-term and even greater long-term potential…
New menu and technology innovations, changing customer demographics, and the growth of delivery services make restaurants an intriguing industry for the next 12 months.
There are many restaurant stocks to choose from in this market.
So, to find the best, I turned to the Money Morning Stock VQScore™ system.
This proprietary algorithm tracks more than 1,500 profitable companies and assigns them a score from 1 to 4.9.
The higher the VQScore – which is derived from a deep dive into the company’s fundamental numbers and technical indicators – the more likely the company is to break out in the months ahead.
Restaurant Trends Are Changing
Today’s American consumers are changing.
No longer are they satisfied to go out to dinner after a long week of work. Nor are younger Americans cooking at home with the same vigor of previous generations.
Quick service chains like McDonald’s Corp. (NYSE: MCD) and fast-casual spots like Chipotle Mexican Grill Inc. (NYSE: CMG) continue to gain customers.
Meanwhile, chain restaurants continue see their market share erode.
In their place has been an alarming trend: the rise of digital ordering and home delivery. Industry reports show that delivery accounts for 5% to 10% of all orders.
In fact, the NPD Group said that digital restaurant orders have increased by a clip of 23% each year since 2013. By 2020, they expect that volumes will have tripled during that period.
Smartphone and mobile app orders are expected to become a $38 billion industry, and they will account for 11% of all quick service restaurant sales by next year, according to Business Insider Intelligence.
With restaurant companies focusing on quality and putting a premium on speed, I want to tap into that trend and find a stock that can get us huge gains in the year ahead.
And there’s one firm that stands out above the rest.
The company behind the very first 30-minute guarantee on delivery.
Let’s dive into the best restaurant stock to buy today…
The Top Restaurant Stock to Buy Right Now
Domino’s Pizza Inc. (NYSE: DPZ) stock has pulled back in recent weeks from its June highs of $287.
Shares have pulled back due to Wall Street’s short-term concerns about third-party delivery companies like GrubHub and UberEats. We are witnessing a mobile-app arms race as “take out” food has become the new “dining out” trend.
These competitors have engaged in what can only be described as irrational promotional activities to generate business. These companies are incentivizing people to sign up for their services by giving customers $10 off their first delivery or even up to $100 worth of free delivery fees – practices that can’t be sustained while trying to achieve and sustain profitability. While Dominos isn’t likely to cut its prices in any fundamental way, the ongoing assault from promotions is likely to wither in the months ahead.
When it comes to innovation, Domino’s Pizza is the best in the business. It created the HeatWave bag, designed to keep food warm in 1998. It was the first major pizza chain to start online and mobile ordering.
Its Domino’s Tracker – which allowed people to track their deliveries in real time – was a precursor to virtually every delivery app’s similar functionality today.
In 2015, it created applications that made it possible to order food from your watch, a text, and even your car’s stereo console. And its latest innovation, HotSpots, is a tool that enables deliveries to customers in public places like beaches, parks, and museums.
Dominos has tallied 30 straight quarters of same-store growth. This is all while generating a staggering 60% of its orders last year from mobile applications. Rather than seeing competition from firms like UberEats and Grubhub as a threat to market share, the company’s leaders see it as motivation to innovate and excel.
“We need to keep pushing ourselves to maintain our advantage,” said Art D’Elia, Domino’s chief brand and innovation officer, in an interview with Fast Company in January.
To his point, Domino’s unveiled a 33,000-square-foot innovation garage in Ann Arbor, Mich., last week. The new center features a “pizza theater for developing and testing new technologies, like ordering kiosks and carryout trackers, in a store setting,” according to Food Business News.
The company will allocate a lot of capital to new technologies in GPS delivery tracking, autonomous delivery vehicles, and more.
With a 45-year track record of innovation and a loyal customer base, I expect Domino’s stock to begin rebounding once the “delivery wars” slow down and it regains its dominance as the most innovative delivery company in the United States.
Today’s entry point of $225 is a bargain given the recent pullback. And its VQScore of 4.0 signals that it is poised for a breakout in the months ahead.
Now, there’s no “30-minute guarantee” that Domino’s stock will return to 52-week highs in the next few months. But patient investors with a craving for market-beating gains will find a lot of potential for this restaurant giant.
Wall Street has undervalued the long-term potential of this stock.
I project that Domino’s Pizza could trade at $300 per share in the next 12 months.
That figure represents potential upside of about 33%.
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Source: Money Morning