Chipotle and Shake Shack lead restaurant stocks

The industry’s performance on Wall Street has lagged overall, but fast-casual and QSR stocks have done well, says RB’s The Bottom Line.
Photograph courtesy of Chipotle Mexican Grill

the bottom line

Investors who bet on the restaurant industry in 2019 might have been better off looking elsewhere.

Restaurant stocks are up about 11% this year, based on an analysis of the 46 stocks we track. By comparison, the broader S&P 500 index is up 20%.

It’s not terribly surprising, really. Despite a strong economy, restaurant sales have generally been weak, and profits even weaker, as labor costs take a bite into margins. And the biggest single trend in the industry, third-party delivery, comes with its own profitability questions.

Restaurant companies are being sorted into haves and have-nots, and investors have followed suit, handing strong performances to those (mostly big) companies that are able to attract new customers while punishing those (mostly small companies) that fail to do so.

In general, they are investing big into limited-service chains, especially big-name fast-casual concepts, while shying away from anything that has waitstaff.

Three of the best-performing stocks so far this year are big, well-known fast-casual brands: Chipotle Mexican Grill (up 75%), Shake Shack (up 65%) and Wingstop (up 52%).

All three boast thriving technology and takeout strategies. Chipotle’s performance is particularly notable: The chain is on the verge of recovering all of its lost value in the aftermath of its 2015 food safety incidents.

Chipotle’s stock has outperformed every other restaurant company this year outside of the super small-cap Rave Restaurant Group. The owner of Pizza Inn and Pie Five is up about 250%, but also historically prone to wild valuation swings.

On the other hand, The Habit Burger Grill (down 4%), Good Times Burgers & Frozen Custard (down 20%) and Potbelly Sandwich Shop (down 45%) have all struggled to win over investor converts.

A better bet overall for investors has been quick-service restaurants, which are larger and have more marketing power. The typical fast-food chain is up 28% this year, led by Burger King owner Restaurant Brands International (up 39%), Del Taco (up 27%) and Wendy’s (up 24%).

McDonald’s, meanwhile, is up 21% this year and is at its all-time high.

Casual and family dining have performed less well this year. The stocks are up 3% on average, though that improves to 8% when factoring out Kona Grill, which has lost 99% of its value this year and filed for bankruptcy protection.

Casual-dining same-store sales have actually performed relatively well. Dine Brands stock is up 47% thanks to strong performances by Applebee’s and IHOP. Olive Garden owner Darden Restaurants is up 26% thanks to strong performances by its brands.

Buyout agreements, or speculation about buyouts, have also propelled a lot of chains. J. Alexander’s is up 37% this year in part based on a push by an activist investor for the company to be sold. Red Robin is up 16% for similar reasons.

Del Frisco’s Restaurant Group is up just 11%, even though it’s being sold to the private-equity firm L Catterton.

Cost and other concerns have hit the sector, however. Texas Roadhouse is down 11% despite perpetually strong sales. BJ’s Restaurants is down 20% despite its own strong sales. And Chili’s owner Brinker International is down 12%.

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