Wall Street is gravitating to low-priced restaurant chains.
Restaurant stocks have taken a beating this year, which is not a surprise given that the past few weeks have been tough on stocks, period. On Thursday, the S&P 500 fell 1.4%, and is now down more than 10% from its peak in February. That is a “correction,” meaning investors are revaluing much of the publicly traded universe.
The Nasdaq Composite Index is already there, down more than 13% over the past month. The Dow Jones Industrial Average is down more than 8%. Each of the major indexes have more than lost their post-election gains, when investors bet that President Trump’s election would be good for profitability.
They’ve apparently changed their minds. Trump’s repeated tariff threats, a few of which have been fulfilled, have added a level of uncertainty to the economy.
On Thursday, Trump threatened a 200% import tax on European alcohol after the European Union threatened an import tax on American whiskey. On Wednesday, Trump imposed 25% tariffs on all steel and aluminum imports. Earlier this month, 25% tariffs were imposed on some goods from Canada and Mexico. It’s all adding to the prospect of higher prices—wiping out investors’ good feelings following a better-than-expected inflation report on Wednesday and the prospect of lower corporate regulation.
The stock selloff in recent weeks has certainly been felt among the publicly traded restaurant universe. Most stocks are down so far this year. The median restaurant stock is down 13.6%. Eight companies, including Cava, Shake Shack, Denny’s and Krispy Kreme, among others, have lost at least a third of their value.
But investors’ caution on restaurants isn’t evenly spread. Investors have shifted money into some of the biggest fast-food chains on the public markets. Of the 13 companies that are up so far this year, 12 of them are limited service and only one is a casual diner (we’ll let you guess – it rhymes with Phillies). Eight of them are quick-service companies.
And that includes many of the largest fast-food companies: McDonald’s (3%), Starbucks (5.5%), Yum Brands (15%), Restaurant Brands International (1.5%) and Domino’s (3%). Even then, the median fast-food stock is down 2.6%.
Some of the best-performing stocks this year have reasons for it. Two of the three top-performing companies, Noodles & Company and Rave Restaurant Group, are penny stocks where price changes can fluctuate wildly. Another, Portillo’s, is facing an activist investor. Few things juice a stock quite like shareholder activism.
And investors have clearly punished some companies that have underperformed expectations or said their sales have slowed, such as Krispy Kreme (down 46%), Shake Shack (down 37%) and Dave & Buster’s (down 41%).
Investors are likely betting that the big fast-food companies will be better able to withstand the challenges brought about by tariffs. Or maybe they’re expecting a shift to value if the economy hits a recession. In the case of Yum Brands, it’s a clear sign of faith in Taco Bell, where same-store sales are on pace to increase 8% this quarter—a number that stands out starkly in a sea of concern about slowing fast-food sales this year.
And the names are just larger, period. And in times of uncertainty, people rush to the best-known names and take fewer risks.