Mad Money

Cramer's Favorite Restaurant Stocks


Investing in restaurants, an economically sensitive and often volatile business, doesn’t always make sense. But Cramer on Monday listed five reasons why these stocks are finally coming back into favor. Of course, he shared his top picks with viewers.

Cramer wants investors to buy Darden Restaurants , parent company of Olive Garden, Red Lobster and Long Horn Steakhouse, and Brinker International , owner of Chili’s and On the Border, on any pullback. The number one and two casual-dining chains in the world, respectively, are up big after reporting solid quarterly earnings, so wait for a better price. In this market, you’re almost guaranteed one.

Food For Thought

So what’s the bullish case for owning these stocks? First off, restaurants don’t have the luxury of federal aid. There’s no TARP money for the Olive Garden or Chili’s. That means the recession has thrown this industry into a Darwinian fight for survival. Only the strong will survive. Both Darden and Brinker know this. So as Outback limps its way through this downturn, Darden and its Long Horn Steakhouse keep prices low and snatch up market share.

Reason number two: Commodity costs are way down. Beef and chicken are cheaper, and these companies will soon see the benefits. As soon as their higher-priced contracts roll over. Keep in mind also that gas prices are down. That puts more money in consumers’ pockets, money for dinner out with the family.

The third positive for restaurants is talent retention. Recessions mean fewer job opportunities. So instead of key managers using these corporate titans as a launching pad to further their careers, they’ll stay put.

Another plus for Darden and Brinker is that media costs have declined. Problems with big advertisers, such as the auto companies, have dramatically reduced costs, which is good news for restaurants that thrive on national ad campaigns and scale. As Cramer pointed out, it was Red Lobster’s “wood fire grill” ads that provided a huge boost to that chain’s business.

Lastly, these restaurants are affordable. Olive Garden offers never-ending pasta bowls, as well as unlimited soup, salad and breadsticks. So even during this recession, a whole family can eat without breaking the bank. And the same-store sales numbers prove it: The Garden was up just under 1% last quarter, the 57th consecutive quarter of growth. So customer loyalty doesn’t fade during a slowdown.

The stocks are cheap, too. Darden’s selling at just nine times earnings with 8% sales growth, even after a recent run in share price. Still, Cramer wanted investors to wait for a pullback before buying. As we said, you'll get that chance if you're patient.

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