Hedge Your Risk With Food

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The recent wave of panic selling may continue over the short-term.

Investors have been able to do well in an environment of declining bond coupon values. Generally speaking, investors are rotating out of low risk securities and have been buying into higher risk securities in order to avoid the loss of capital from a depreciating bond portfolio.

Therefore, the logical conclusion was to buy stocks. Therefore, in this environment low risk, non-cyclical stocks trading at a reasonable P/E multiple should be bought. In order to do this, I am going to focus on three names in the restaurant sector that will help to protect an investor’s portfolio.

Restaurants are always good

Generally speaking, an investor has a decent chance of protecting their investment portfolio by being invested in restaurant chains. The service sector has been able to grow consistently, and everyone loves eating out. The sector is somewhat non-cyclical.

The restaurant sector is pretty well hedged against technology. Meaning that unlike investing into Hewlett-Packard or Google the company doesn’t have to worry about a technological revolution that can make the company’s current portfolio of products obsolete. After all, how do you replace the brilliance of the “drive through.”

I’m lovin’ it

McDonald’s (NYSE: MCD) is still one of my favorite stocks right now. It trades at a reasonable 17.9 earnings multiple. The company has $2.3 billion in cash on its balance sheet,and is therefore financially stable. The company’s growth is primarily driven by its ability to increase the average revenues generated per McDonald's restaurant or increases in the number of McDonald's locations worldwide. For now, the management team is focused on increasing the quality of the McDonald's dining experience by encouraging franchisees to stay open late, and offer the breakfast menu over the course of the day. The company is also increasing the number of its product offerings through its McCafe.

Analysts on a consensus basis anticipate the company to grow its earnings by 6.3% for the full-year. It’s a little lower than the historical 8.76% average over the past 5 years, as the company is focused on store remodeling and improving the McDonald’s experience to remain competitive with Burger King and Jack in the Box. Currently McDonald’s pays its investors a 3.19% dividend yield, so you get a proper mix of income and growth.

Think outside the bun

Yum! Brands (NYSE: YUM) is another one of my home grown favorites. The company operates KFC, Taco Bell, and Pizza Huts around the world. Yum! Brands is focused on selling food that doesn’t involve a meat patty stuck between two bread buns. That may be why the company has been deploying a lot of capital to expand into China with its franchises.

Yum! Brands trades at a 21.5 earnings multiple, which is fairly reasonable, because of the low amount of risk franchised restaurant operators have when compared to other industries. Also, the growth strategy is fairly predictable, making it an easy investment for mutual funds that want to earn safe investment yields.

Analysts on a consensus basis anticipate the company to grow earnings by 11.69% on average over the next 5 years. The company also pays its investors a 1.98% dividend yield. One potential upside catalyst involves exponential growth from its direct involvement in China.

The 24 hour diner

I am an enormous fan of Denny’s (NASDAQ: DENN). The concept of being able to eat in a family restaurant 24 hours a day is both brilliant and lucrative. The company has a $553 million market capitalization, meaning that the company is small enough to grow, but is sturdy enough to stand on its own. Analysts on a consensus basis anticipate the company to grow earnings by 19% on average over the next 5 years. The company also recently started opening franchises in markets outside of the United States.  Denny's doesn't pay its shareholders a dividend, but it at least makes up for it with growth.

Conclusion

Investors who are afraid of losing capital in a volatile market environment should consider investing in these three restaurants. The company's are financially stable, can build upon a working business model, and have a predictable pattern of growth. McDonald's and Yum! also comes with the added benefit of dividends, which can either be used as income or reinvested for compounding returns.

McDonald’s turned in a dismal year in 2012, underperforming the broader market by 25%. Looking ahead, can the Golden Arches reclaim its throne atop the restaurant industry, or will this unsettling trend continue? The Fool's top analyst weighs in on McDonald's future in a recent premium report on the company. Click here now to find out whether a buying opportunity has emerged for this global juggernaut.


Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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