1 Growth Stock Down 78% to Buy Right Now

Restaurant stocks have struggled in recent years, perhaps none more so than Portillo's (NASDAQ: PTLO). The Chicago street food king has seen its stock fall 78% from all-time highs around its initial public offering (IPO) in late 2021, making it one of the worst-performing stocks of the last few years. Not a happy time for shareholders.

However, if potential investors pop open the hood and look at how the actual business is performing, Portillo's is doing just fine. In fact, it looks to have a long runway for growth as it expands across the United States.

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With a discounted price and a market cap below $1 billion, Portillo's is a great growth stock to buy right now. Here's why.

Bringing Chicago street food across the country

Portillo's began decades ago as a local chain in the Chicago area, selling hot dogs and Italian beef sandwiches. The brand built up a cultlike following for Chicagoans, but never truly expanded to other markets outside the Midwest.

That is, until a few years ago. Portillo's was purchased by a private equity firm and then spun out through an IPO in 2021, with plans for national expansion. It is now growing location count by more than 10% a year and should top 100 by the end of 2025. Over the long term, management expects that the concept can get close to 1,000 locations around the United States.

Today, Portillo's is pushing for expansion into Sun Belt markets such as Arizona, Texas, and Florida, where a lot of Chicagoans have moved. This gives it a kick-start in brand recognition when a new location opens. Since going public, Portillo's revenue is up 43% and should steadily grow in the years to come as more stores open. In 2025, management is guiding 11% to 12% revenue growth compared to 2024.

Will comparable-store sales growth recover?

Unit growth is not a concern for Portillo's and is not why the stock has floundered. What has investors concerned is the lack of consistent comparable-store sales growth, which measures revenue growth from existing restaurant locations.

For the first three quarters of 2024, Portillo's posted comparable-store sales declines and only a slightly positive 0.4% figure for Q4. Management is guiding for an improvement of flat to 2% comparable-store sales growth in 2025, but is still much lower than restaurant competitors such as Chipotle or Cava Group.

Comparable-store sales growth and driving consistent traffic to stores is important for a restaurant to maintain operating leverage over its fixed cost base, commodity inputs, and labor costs. Essentially, a restaurant needs to grow faster than its input costs in order to maintain profit margins. While Portillo's is currently growing on a same-store basis below inflation, I don't think it is a concern over the long term.

Why? Because of the way a Portillo's location opens in new markets. With many people in Arizona, Texas, or Florida already aware of the Portillo's brand, the restaurants typically experience an explosion of traffic in the first few quarters. This starts a Portillo's location at already-high average unit volumes (AUVs).

In fact, Portillo's has some of the best AUVs in the industry at $8.7 million in 2024. Starting at such a high level makes it harder for a Portillo's to post strong comparable sales growth compared to other restaurant concepts, even if each location still remains profitable. Over the long haul, this should balance out, as long as enough people are still frequenting the restaurant locations.

PTLO Revenue (TTM) data by YCharts

Why Portillo's is a great growth stock to buy right now

With the stock discounted due to unnecessary concerns over comparable-store sales growth, I think Portillo's stock is a wonderful growth stock to buy on the dip.

Let's make some forward assumptions to show why this is the case. If Portillo's grows its locations by 12% a year for the next three years, it will hit around 132 locations. This assumes AUV remains flat at $8.7 million -- new locations won't generate as high of sales as long-standing Chicago-area restaurants --and revenue climbs to around $1.2 billion.

A typical restaurant that owns its locations like Portillo's can generate bottom-line profit margins of 10%, if not higher, and 10% profit margins on $1.2 billion in revenue equates to $120 million in net income for Portillo's. Today, the stock trades at a market cap of $888 million, or a forward price-to-earnings ratio (P/E) of just 7.4 a few years in the future. It will take patience and a long-term time horizon, but now looks like a fantastic time to buy Portillo's stock and hold on for many years.

Should you invest $1,000 in Portillo's right now?

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and recommends the following options: short March 2025 $58 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.