From fast food to fine dining, restaurants play a vital societal role. But it’s not all sunshine and rainbows as they’re notoriously hard to run thanks to perishable ingredients, labor shortages, or volatile consumer spending. Unfortunately, these factors have spelled trouble for the industry as it has shed 7% over the past six months. This drawdown was discouraging since the S&P 500 stood firm.

Investors should tread carefully as any operational misstep or unforeseen change in preferences can have you catching a falling knife. Keeping that in mind, here are three restaurant stocks best left ignored.

Jack in the Box (JACK)

Market Cap: $241 million

Delighting customers since its inception in 1951, Jack in the Box (NASDAQ: JACK) is a distinctive fast-food chain known for its bold flavors, innovative menu items, and quirky marketing.

Why Do We Avoid JACK?

1. Disappointing same-store sales over the past two years show customers aren’t responding well to its menu offerings and dining experience
2. Efficiency has decreased over the last year as its operating margin fell by 9.3 percentage points
3. High net-debt-to-EBITDA ratio of 11× could force the company to raise capital at unfavorable terms if market conditions deteriorate

Jack in the Box is trading at $12.57 per share, or 3.4x forward P/E. Read our free research report to see why you should think twice about including JACK in your portfolio.

Portillo's (PTLO)

Market Cap: $384.1 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 Are We Out on PTLO?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
2. Investment activity picked up over the last year, pressuring its weak free cash flow margin of -0.6%
3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

Portillo’s stock price of $5.65 implies a valuation ratio of 28x forward P/E. Dive into our free research report to see why there are better opportunities than PTLO.

Red Robin (RRGB)

Market Cap: $60.91 million

Known for its bottomless steak fries, Red Robin (NASDAQ: RRGB) is a chain of casual restaurants specializing in burgers and general American fare.

Why Do We Pass on RRGB?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
2. Earnings per share have contracted by 20.5% annually over the last six years, a headwind for returns as stock prices often echo long-term EPS performance
3. High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens

At $3.37 per share, Red Robin trades at 7.7x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why RRGB doesn’t pass our bar.

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