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$1 cocktails and cheesy bacon fries could make Dine Brands, McDonald's top restaurant stocks in 2019

Key Points
  • Analyst Mark Kalinowski names McDonald's and Dine Brands, parent of Applebee's and IHOP, his top restaurant stock picks for 2019.
  • Kalinowski's previous picks have outperformed the S&P 500 since 2009.
  • Applebee’s cheap cocktails are driving massive traffic to its restaurants.
  • McDonald's could benefit from its nationwide launch of cheesy bacon fries in early 2019.
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McDonald's shares ended 2018 up only 3 percent, but at least one analyst expects even greater growth this year — going so far as to name the stock one of his top restaurant picks for 2018.

Mark Kalinowski, president and CEO, Kalinowski Equity Research, put out his 10th annual top restaurant picks Wednesday, naming McDonald's and Dine Brands as his two top stocks for the coming year.

Kalinowski's previous picks have outperformed the S&P 500 since 2009.

"Looking back to the end of 2009, and through the end of 2018, the value of $10,000 invested in the Kalinowski top picks would now be worth $58,345," Kalinowski wrote. "The value of $10,000 invested in the S&P 500 over that time would now be worth $30,048."

This year, Kalinowski applauded Dine Brands, in particular Applebee's, as well as McDonald's for their menu innovation and their ability to drive sales.

Applebee's and $1 cocktails

Dine Brands is the parent company of both Applebee's and IHOP. While both restaurants have seen strong growth, Applebee's sales momentum has been a bit more noteworthy in the last year.

Cheap alcoholic beverages and dinner deals lured customers into Applebee's restaurants during the third quarter and helped boost same-store sales 7.7 percent, John Cywinski, president of Applebee's, told CNBC in November. That's massive growth compared with the rest of the industry, which saw same-store sales rise 1.2 percent in the same period, according to Black Box Intelligence data.

In 2017, the company introduced $1 margaritas, dubbed "dollaritas," in an effort to bring in younger diners, who tend to prefer limited-service chains such as Chipotle, Chick-fil-A and Taco Bell, where they can order and go.

Applebee's now does a neighborhood drink special, a monthly drink promotion that ranges from $1 Zombie Drinks to $3 Grey Goose vodka and Ocean Spray cranberry juice. This January, the restaurant is introducing $2 Captain Morgan rum-and-Coke or other colas. Kalinowski foresees this promotion resonating even better with customers than last year's $2 Blue Moon beer promotion.

"We asked management in general what types of its Applebee's 'Neighborhood Drink of the Month' drink specials tend to do better than others," Kalinowski reiterated Wednesday. "When we asked about the performance of mixed drinks versus beer specials, management indicated 'everybody has cheap beer,' hinting that — all else equal — it's the mixed-drink specials that tend to do better.'"

McDonald's and cheesy bacon fries

While Kalinowski foresees a modest same-store sales gain for McDonald's, he said he thinks the burger chain will outpace the growth of its closest competitors, Burger King and Wendy's. Kalinowski pointed to a $6 "classic meal deal" promotion that ended shortly after it began as a sign that it didn't resonate with customers and, thus, didn't bolster sales.

However, upcoming marketing campaigns could be a boon for McDonald's. Kalinowski said he was excited about the nationwide launch of cheesy bacon fries in early 2019, especially if sales progress beyond the initial trial period. Taco Bell saw great success with its launch of nacho fries, leading the brand to bring the promotion back several times over the course of 2018.

In addition to menu innovation, Kalinowski views McDonald's management strategy as positive going into 2019. While franchise owners have raised concerns in recent months about restaurant upgrades and dollar menu changes, Kalinowski said the creation of the first-ever independent franchisee association in the U.S. could be a move that will strengthen McDonald's as a whole.

Internationally, Kalinowski expects the brand to see even more growth.

"Outside of the U.S., in general McDonald's faces meaningfully less competition, so odds are same-store sales in international markets in aggregate will be better in 2019 than they will be in the U.S. in 2019," Kalinowski wrote.