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Stock Strategist Industry Reports

Restaurant Stocks: What's Cooking for Investors?

Valuations look full, as chains such as McDonald's realize turnaround efforts. But good deals are still on the menu.

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The restaurant sector had an interesting 2015.  Chipotle Mexican Grill (CMG) made headlines for all the wrong reasons when a few of its locations served food that made customers sick, leading to its shares getting battered.  McDonald's (MCD) picked a new CEO, who promptly got the fast-food behemoth into turnaround mode by rolling out an all-day breakfast menu option.  Yum Brands (YUM) announced plans to spin off its Chinese operations, moving the parent of KFC, Taco Bell, and Pizza Hut to a franchise-centric business model.

Investors brushed off the bad news with the good, focusing on potential versus past pitfalls. Indeed, valuations across the sector look full or outright rich. McDonald's shares rose almost 30% last year and now trade near Morningstar's fair value estimate. Shake Shack (SHAK), one of the year's hottest IPOs, saw its shares nearly double before cooling off last summer. Nevertheless, the shares still trade at roughly 100 times forward earnings.

Rob Wherry does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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