Tacos are often considered a go-to food for every occasion that can be enjoyed anywhere because it is easy to carry, easy to eat, and quite suitable for dining-out. Fast-casual food operators and restaurants offer a wide range of customized tacos that are acceptable to even fussy eaters. Furthermore, their healthier and less costly features have powered tacos toward being the dominant appetizer everywhere.

Both online and brick-and-mortar food operators are experiencing high pent-up demand for tacos. As such, quality stocks in this space Yum! Brands, Inc. (YUM) and El Pollo Loco Holdings, Inc. (LOCO) are well-positioned to cash in on the trend.

However, with consumers’ preference shifting towards healthier and homemade food, we think fundamentally weak companies in this space—Chipotle Mexican Grill, Inc. (CMG) and Fiesta Restaurant Group, Inc. (FRGI)—might struggle to stay afloat.

Stocks to Buy:

Yum! Brands, Inc. (YUM)

YUM operates and franchises more than 50,000 restaurants in several countries under the KFC, Pizza Hut, Taco Bell, and The Habit Burger Grill brands. YUM runs around 25,000 KFC units, 17,639 Pizza Hut units, 7,427 Taco Bell units, and 287 The Habit Burger Grill units in more than 150 countries and territories. The company is headquartered in Louisville, Ky.

In September, YUM acquired Dragontail Systems Limited, a provider of technology solutions for the food industry. Through this acquisition, YUM intends to deploy Dragontail’s AI kitchen order management, delivery, and other technologies globally to its brands and franchises.

YUM’s total revenues for the third quarter, ended September 30, 2021, increased 10.9% year-over-year to $1.61 billion. The company’s operating profit grew 11.9% from its year-ago value to $527 million. Its net income rose 86.6% from the prior-year quarter to $528 million. Also, the company’s EPS increased 90.2% year-over-year to $1.75.

Analysts expect YUM’s revenue for its fiscal year 2021 to be $6.57 billion, representing 16.2% year-over-year growth. The company has an impressive earnings surprise history; it beat the consensus EPS estimates in each of the trailing four quarters. YUM’s EPS is expected to increase 25.1% in the current year and 9.7% next year. And the stock has gained 23.3% in price over the past nine months and 28.4% over the past year.

YUM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.

Also, the stock has an A grade for Quality, and a B grade for Momentum. We’ve also graded YUM for Growth, Value, Stability, and Sentiment. Click here to access all YUM’s ratings. YUM is ranked #17 of 44 stocks in the A-rated Restaurants industry.

El Pollo Loco Holdings, Inc. (LOCO)

LOCO, in Mesa, Calif., develops, franchises, licenses, and operates quick-service restaurants under the El Pollo Loco brand. The company operated approximately 475 company-owned and franchised restaurants in Arizona, California, Nevada, Texas, Utah, and Louisiana as of March 11, 2021.

For the second quarter, ended June 30, 2021, LOCO’s total revenue increased 22.5% year-over-year to $121.99 million. The company’s operating income grew 70.1% from its year-ago value to $12.67 million. Its net income rose 60.4% from the prior-year quarter to $8.82 million. Also, the company’s EPS increased 50% year-over-year to $0.24.

LOCO’s revenue is expected to increase 9.3% year-over-year to $465.84 million in its fiscal year 2021. The company has an impressive earnings surprise history; it beat the consensus EPS estimates in each of the trailing four quarters. LOCO’s EPS is estimated to increase 25% in the next quarter and 9% in the current year.

LOCO’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to a Buy in our proprietary rating system. Also, the stock has a B grade for Value, Momentum, and Stability.

In addition to the POWR Rating grades I’ve just highlighted, one can see LOCO’s ratings for Growth, Quality, and Sentiment here. LOCO is ranked #15 in the Restaurants industry.

Stocks to Avoid:

Chipotle Mexican Grill, Inc. (CMG)

CMG, together with its subsidiaries, operates Chipotle Mexican Grill restaurants. The Denver, Colo.-based concern operates Chipotle restaurants throughout the United States, international Chipotle restaurants, and non-Chipotle restaurants, and serves only meats in its Chipotle restaurants. The company-owned and operated approximately 2,900 restaurants in the United States, Canada, the United Kingdom, France, and Germany as of October 21, 2021.

Last month, National law firm Morris Kandinov commenced  investigating CMG regarding corporate governance failures, possible breaches of fiduciary duties, and other law violations, including securities claims on behalf of shareholders related to recent transactions and events at the company. This turn of events might negatively impact CMG’s price performance in the near term.

CMG’s total revenue increased 21.9% year-over-year to $1.95 billion for the third quarter, ended September 30, 2021. However, the company’s total operating expenses grew 14.6% from its year-ago value to $1.71 billion. Also, its other operating costs rose 9.8% from the year-ago value to $294.65 million.

CMG’s stock has declined 7% in price over the past month and 3.8% over the past three months.

CMG’s POWR Ratings are consistent with this bleak outlook. The stock has a C grade for Sentiment, and a D for Growth and Value.

Click here to see the additional POWR Ratings for CMG (Momentum, Stability, and Quality). The stock is ranked #33 in the Restaurants industry.

Fiesta Restaurant Group, Inc. (FRGI)

Incorporated in 2011, FRGI owns, operates, and franchises fast-casual restaurants under the Pollo Tropical and Taco Cabana brands. The Addison, Tex.-based company’s menu features mojo roast pork and TropiChops, balsamic tomatoes, chicken fajitas, feature-loaded tacos, breakfast tacos, dozen taco boxes, and a wide range of Mexican-inspired food.

During the second quarter, ended July 4, 2021, FRGI’s total revenues increased 43.7% year-over-year to $91.16 million. However, the company’s total operating expenses grew 24.5% from their year-ago value to $89.26 million. Its net loss came in at $83,000 for the period.

Analysts expect FRGI’s revenue to decrease 25.3% year-over-year to $414.38 million for its fiscal year 2021. The company’s EPS is estimated to decline 75% in the current quarter. Its stock has declined 24.2% in price over the past three months and 27.8% over the past nine months.

FRGI’s poor prospects are reflected in its POWR Ratings. The stock has a D grade for Growth and Sentiment. Click here to access the additional FRGI’s ratings (Stability, Value, Momentum, and Quality). FRGI is ranked #24 in the Restaurants industry.

CMG shares were trading at $1,775.42 per share on Friday morning, down $2.21 (-0.12%). Year-to-date, CMG has gained 28.03%, versus a 23.63% rise in the benchmark S&P 500 index during the same period.

About the Author: Priyanka Mandal

Priyanka is a passionate investment analyst and financial journalist. After earning a master's degree in economics, her interest in financial markets motivated her to begin her career in investment research. More...

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