Restaurants increase convenience and give many people a place to unwind. Still, their demand can ebb and flow with the broader economy because consumers can always cook meals at home when times are tough, and the market seems to be baking in a downturn for the industry - over the past six months, it has pulled back by 1.1%. This drop was disappointing since the S&P 500 stood firm.

The elite companies can churn out earnings growth under any circumstance, however, and our mission at StockStory is to help you find them. On that note, here are two restaurant stocks we think can generate sustainable market-beating returns and one best left ignored.

One Restaurant Stock to Sell:

Portillo's (PTLO)

Market Cap: $814.3 million

Begun as a Chicago hot dog stand in 1963, Portillo’s (NASDAQ:PTLO) is a casual restaurant chain that serves Chicago-style hot dogs and beef sandwiches as well as fries and shakes.

Why Does PTLO Give Us Pause?

1. Modest revenue base of $710.6 million gives it less fixed cost leverage and fewer distribution channels than larger companies
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.5% for the last two years
3. High net-debt-to-EBITDA ratio of 5× increases the risk of forced asset sales or dilutive financing if operational performance weakens

Portillo’s stock price of $12.70 implies a valuation ratio of 40x forward price-to-earnings. To fully understand why you should be careful with PTLO, check out our full research report (it’s free).

Two Restaurant Stocks to Watch:

Wingstop (WING)

Market Cap: $6.38 billion

The passion project of two chicken wing aficionados in Texas, Wingstop (NASDAQ:WING) is a popular fast-food chain known for its flavorful and crispy chicken wings offered in a variety of sauces and seasonings.

Why Will WING Outperform?

1. Same-store sales growth over the past two years shows it’s successfully drawing diners into its restaurants
2. Disciplined cost controls and effective management resulted in a strong two-year operating margin of 25.6%, and its profits increased over the last year as it scaled
3. WING is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders

Wingstop is trading at $222.40 per share, or 52.3x forward price-to-earnings. Is now the time to initiate a position? Find out in our full research report, it’s free.

Dutch Bros (BROS)

Market Cap: $8.19 billion

Started in 1992 by two brothers as a single pushcart, Dutch Bros (NYSE:BROS) is a dynamic coffee chain that’s captured the hearts of coffee enthusiasts across the United States.

Why Should BROS Be on Your Watchlist?

1. Rapid rollout of new restaurants to capitalize on market opportunities makes sense given its strong same-store sales performance
2. Average same-store sales growth of 4.3% over the past two years indicates its restaurants are resonating with diners
3. Operating profits and efficiency rose over the last year as it benefited from some fixed cost leverage

At $70.90 per share, Dutch Bros trades at 133.2x forward price-to-earnings. Is now a good time to buy? See for yourself in our full research report, it’s free.

Stocks We Like Even More

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Take advantage of the rebound by checking out our Top 9 Market-Beating Stocks. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

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