These Stocks Could Ruin Your Portfolio!

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Recently I read an article stating that obesity is on the decline. I Googled the stat, only to find that the obesity rate amongst children had dipped for the first time in the last 10 years.

Obesity causes a wide range of health problems, and people all over the world have begun realising the importance of a healthy eating lifestyle. Burgers and pizzas are being shrugged at, and consumers prefer healthier foods. This may be good for the human health, but retail chains like McDonald's (NYSE: MCD), Yum! Brands (NYSE: YUM), and Chipotle Mexican Grill (NYSE: CMG) have nothing to cheer about.

All is Not Well

McDonalds is one of the largest fast food chains in the world, and it recently reported that its global same-store sales declined by 1.8% in November, but rose by 2.4% in December.  But if we take a larger time frame, it’s not hard to see that its same-store sales are sliding, and according to management financially troubled countries are to be blamed. Moreover, the retail chain will be opening 225-250 new stores in China. That sounds good, right?

McDonalds already has more than 1,500 stores in China, and adding 250 new stores would take the tally close to 1800. The reason behind the dull reaction is that Yum! reported a slowdown of growth in the China. In my opinion, McDonald’s will also remain under pressure due to reduced consumer spending in the country. Moreover, the slowdown for Yum! in China was also due to the rising concerns of animal cruelty, and health impacts of injecting excessive antibiotics in chickens.

Several reports have popped up that KFC changed its name from Kentucky Fried Chicken because it serves genetically modified birds, which are not chicken. Some media reports claimed that the birds are cooked while they are still alive. I'm not sure if these reports are true, but I confident that these reports will negatively impact its revenues. Jonathan Blum said, "Our primary emphasis now is to rebuild consumer confidence and sales in China." This means inflating marketing costs when the revenues are falling. Not a good stock to hold!

Why You Shouldn’t Invest in McDonalds, Yum! or Chipotle

Moreover, the Indian currency (₹) has depreciated around 30% against the USD over the last 18 months, which is negatively affecting the profitability of Yum! Brands and McDonalds. The currency is expected to further fall due to poor policy and decision making by the Indian government, and a number of corruption cases that have tarnished India’s reputation of being a Breakout Nation.

If this was not enough, fast foods like pizza’s, burgers, and burritos are bad for health. My gym trainer has strictly advised me to stay away from these food items, and I’m pretty confident that most youngsters like me will be switching to healthier foods. As a matter of fact, Chipotle’s burritos are ranked as the 16th worst food item for the waistline in Men’s Health magazine.

In my opinion, Chipotle needs to plan inorganic growth in order to offset falling revenues due to rising health concerns. But as of now the management of Chipotle has no plans to expand abroad. Moreover, its trade at a forward P/E of 26.3x, a P/B of 8x, and carries a PEG of 1.83x, which indicates that its shares are greatly overvalued. It's P/FCF of 45x and quick ratio of 2.8x suggest that the company has weak fundamentals, and that it won't be able to comfortably repay its short term unplanned liabilities without raising debt.

The Healthier Options

This leaves us with 2 investment options: Wendy’s (NASDAQ: WEN) and Kroger (NYSE: KR). Due to the increased priority of healthier foods, Wendy’s has launched low fat food fast food products like boiled potatoes and chili. Yes, most of its offerings include traditionally high calorie food items like sandwiches, but it all comes down what’s inside. Wendy’s products are not filled with cheese or fried potatoes, which brings down the calorie count.

But if we talk about eating healthy food items at home, Kroger tops the list. The grocery chain is not be a direct competitor of the other companies mentioned here, and it recently launched its “Simple Truth” and “Simple Truth Organic” brands. Its nutritional experts claim that these products are free from 101 artificial ingredients and preservatives, which are known to cause serious health problems over the longer run.

Company

Yield

5 yr. EPS growth (expected)

Wendy’s

3.27%

15.61%

Kroger

2.3%

9.35%

Foolish Conclusion

In my opinion, health awareness will only increase with time. Investing in McDonalds or Chipotle may bring returns over the shorter time frame, but I believe that long term investors should look to capitalize on the global paradigm shift to healthier foods. I also believe investors should stay away from Yum! Brands. Analysts expect the EPS of both Wendy’s and Kroger to grow at a rapid pace, while they still offer a modest dividend yield. Both Wendy’s and Kroger get a Foolish Buy Rating.


PiyushArora has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill and 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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