By Merdie Nzanga
Despite the market swoon, investors aren't losing their appetite for fast-casual dining stocks.
Wendy's Co. was one of the latest fast-food stocks to jump, gaining 6% Wednesday in midafternoon trading after it reported a same-store sales increase of 1.4% for the second quarter. On Tuesday, rival Shake Shack Inc. closed at $86.72 and rose $13.38, or 18.24%, for its best daily percentage gain on record. Yum Brands Inc. reached an all-time intraday high of $119.72 last week. Shares of the company, which owns KFC, Pizza Hut and Taco Bell, are up 26% so far this year.
The shares of the fast-casual dining sector have been strong performers among consumer-discretionary stocks. While the sector was off 0.4% Wednesday amid a broader market decline, it has posted a 17.2% gain since the start of the year.
Shares of these chains are traditionally seen as defensive, analysts say: People still go out for fast-food even if the economy slows. In addition, they are seen as attractive these days because some of these chains are offering healthier food options along with technology that makes it easier for customers to place orders.
"The earning growth rates could slow, but [these chains] could do better than full food service," said Eric Gonzalez, a senior restaurant analyst with Keybanc Capital Markets.
Mexican-food chain Chipotle Mexican Grill Inc. has been a leader, with its stock price up 83% since the beginning of the year. One reason for its success, analysts say, is its use of third-party carriers, such as DoorDash Inc. and its mobile app. It almost doubled its digital sales to 18.2% for the second quarter, compared with 10.3% this time last year.
While America's seemingly endless appetite for Chipotle's tacos, burritos and bowls has grabbed the headlines, McDonald's Corp., too, has remained an investor favorite. The chain's shares are up 21% so far this year. It has taken steps to reinvent its food quality, now using all white-meat chicken, for example. In addition, it has successfully incorporated technology for customers, with upgrades such as touch-screen, self-ordering kiosks.
There is one factor that could make McDonald's more attractive to investors than Chipotle over the long-term: McDonald's has a large international presence, which could hedge it against slowing growth in the U.S. Yum Brands, too, has outlets overseas.
"Broadly speaking, international exposure can be a benefit for particular fast-food restaurant stocks," said Keybanc's Mr. Gonzalez.
A Chipotle spokeswoman said the company is currently focused on the U.S.
"We plan to open 140-155 new locations this year and believe there is still tremendous runway for a larger domestic footprint before setting our sights abroad," said spokeswoman Erin Wolford.