Restaurant stocks poised to go higher but beware of rising employment costs, says Piper Jaffray

There is “no doubt” restaurant stocks are going higher, according to Nicole Miller Regan, senior restaurant analyst for Piper Jaffray.

“It’s the year of the restaurant,” she told CNBC’s “Power Lunch” on Friday.

“We have fewer restaurant stocks, creating scarcity value,” she added. “The second thing is we have balanced supply and demand. So sales performance has gone from negative to positive.”

Regan said specifically she likes momentum plays, including Darden Restaurants, McDonald’s and Shake Shack. However, she also likes recovery stories, such as Chipotle and Potbelly, and thinks the casual dining segment will improve, she said.

“We believe domestic, company-owned models are expected to continue to perform well while smaller market capitalization stocks in general may also generate meaningful upside,” Regan said. This is due to the strategic nature of these specific companies.

However, she warns, restaurants could be impacted by rising employment costs.

“It is going to take competent performance to hold that store level margin steady, and that’s why we’re looking at companies with the best culture married with the best cuisine.”

— CNBC’s AJ Vielma contributed to this report.

Disclosures: Piper Jaffray makes a market in securities of Chipotle, Darden Restaurants, McDonald’s, Potbelly, Shake Shake and Restaurant Brands International.

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