Making the Grade
5 Restaurant Stocks I’m Not Taking a Bite of Yet
I have a theory on why people are hoarding toilet paper…
They’re going to be eating their own cooking.
This trend poses both opportunities and pitfalls for investors.
Even though it seems too hard to swallow, the average American spends more than $3,000 each year dining out.
They typically eat away from home 4.9 times a week.
And for the past few decades – despite the vast array of cooking channels and programs – away-from-home spending has dramatically widened its gap over at-home spending.
But now, this rush of dollars has come to a screeching halt… all thanks to COVID-19.
That’s bad news for local restaurants, chains, bars and cocktail lounges. The ever-hungry, ever-thirsty consumer base they relied on is locked indoors. Businesses have been ordered to shut down until they have the “all clear.”
We’re already seeing this trend play out in the skyrocketing unemployment numbers.
And for investors, this could be particularly dangerous to their portfolios.
A Crash Diet for Shares
It’s been a difficult year so far for the broader markets.
Every sector has gone on a crash diet.
But for restaurant stocks, it’s been even worse.
The Invesco Dynamic Leisure and Entertainment ETF (NYSE: PEJ) – with roughly a third of its holdings in eateries – has tumbled more than 44% year to date. That’s considerably worse than the Dow Jones Industrial Average has performed…
Even though the sector has been hit hard, I don’t think it’s time to go discount shopping just yet.
In fact, I would be extremely careful when looking for restaurant blue plate specials.
5 Restaurant Stocks I’m Not Nibbling At
As a trend trader and strategist, I’m far from against investing in restaurant stocks.
Over the years, I’ve made plenty of money for my readers on Buffalo Wild Wings, Domino’s (NYSE: DPZ), Ruth’s Hospitality (Nasdaq: RUTH), Wingstop (Nasdaq: WING) and more.
I believe there’s a time and place to score big on restaurant stocks.
But with these five, I’m not looking to grab a table with my money.
1) Cheesecake Factory (Nasdaq: CAKE) recently told its landlords it’s not paying rent. The company has also furloughed 41,000 hourly workers, and executives voluntarily agreed to a 20% pay cut. At the end of 2019, Cheesecake Factory had a total of 46,250 workers, so a lot of its workforce is gone.
Currently, 29 of its total 294 locations are closed. The rest have switched to an off-premise model.
A company not paying rent probably has further to fall. Especially since it hasn’t announced a suspension or cut on its dividend… yet.
2) Shake Shack (NYSE: SHAK) shares have fallen almost 33% so far in 2020. That seems bad, but it’s performed much better than other burger chains like Wendy’s (Nasdaq: WEN) and Red Robin Gourmet Burgers (Nasdaq: RRGB).
Shake Shack has shifted to a to-go model at all of its U.S. company-owned restaurants. And it has closed several of its restaurants in the Northeast, particularly in hard-hit New York.
Shake Shack had some headwinds prior to the pandemic. And I think it has further to fall to come in line with its competitors.
3) Darden Restaurants (NYSE: DRI) has already announced a 60% drop in same-store sales due to COVID-19 closures. The Olive Garden and LongHorn Steakhouse operator has suspended its dividend. And the company stated that for each percentage point decline in sales, earnings per share will drop $0.06 to $0.08.
With no sales, its burn rate is between $40 million and $50 million per week.
Suspending its dividend and burning through cash make this company’s shares unappetizing to me.
4) Cracker Barrel Old Country (Nasdaq: CBRL) has also suspended its dividend, as well as its share buyback program.
As if that weren’t enough, the company will take a $133 million charge for the foreclosure of its 19 Punch Bowl Social locations, representing all the equity Cracker Barrel dumped into the concept. It has drawn down the remaining $490 million on its $950 million credit facility.
Cracker Barrel shares already tend to struggle during the summer months. (It’s a good Thanksgiving-time play.) But right now, I believe there could be more downside ahead.
5) Beyond Meat (Nasdaq: BYND) had its price target at Goldman Sachs reduced from $129 to $39. Shares are currently trading around $66, so that represents an expected drop of more than 40%. The plant-based meat producer is valued at more than $4 billion yet is expected to see 2020 revenue of $495 million.
I’m not a fan of that big of a gap between valuation and revenue.
In the fourth quarter, $57.8 million of its $98.5 million in net revenue came from restaurants. Without the customer traffic, Beyond Meat will see a noticeable bite out of its sales.
Putting in the Work
Look, it’s tough out there for restaurants.
Just as it is for airlines, casinos, cruise lines, concert venues and theme parks.
Americans are stuck indoors, waiting for the threat of COVID-19 to pass. And even though many restaurants have switched to a carryout or to-go model, this is not enough to support them.
But investors don’t have to watch shares of these companies slide… This is a moneymaking opportunity.
Shorting stocks is one route – though not my preferred.
My favorite play on companies that I think have much further to fall is buying puts. Here, your risk is at least capped to your entire investment, unlike with shorting. And it’s a straightforward process, like buying calls when you’re betting on the upside.
This bear market will be with us at least until COVID-19 cases peak and begin to fall. But for many sectors, the pain will last even longer.
That provides a perfect opportunity to cash in on the downside.
Here’s to high returns,
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