It looks like a perfect storm is brewing for the restaurant sector in the next year to 18 months. They’re calling it the “restaurant recession.”
Due to a glut of restaurants in most markets, competition from independent shops and the point in the cycle the industry is in, there may well be a reckoning soon. And if that’s not enough weak growth in many economies will also affect consumers dining choices.
That’s why it’s important to make sure that if you’re holding restaurant stocks, you’re only holding the best ones. And to get there, you have to dump the ones that are not going to do well during this transitional time.
Below are seven stocks that could get caught in the restaurant recession. If you own these stocks, this is good time to consider swapping them for cash to wait this transition out.
Restaurant Stocks to Watch: Chipotle Mexican Grill (CMG)
Chipotle Mexican Grill, Inc. (NYSE: CMG) had a very tough second half of 2015. It had an E. coli outbreak and a salmonella outbreak in a number of stores.
CMG has never relied on advertising for its messaging; it’s more a modern viral version of marketing where it has a cult-like following. It was certainly one of the pioneers of healthy fast food (in the context of its meat sourcing) and customized ordering.
But the problem with that emotional connection is that it disappears after a trend is in place that puts into question how good its quality control really is. One outbreak, understandable. Another completely different one right on the heels of the first one? That makes a lot of true believers start questioning their beliefs.
What’s more, there is more competition now that has adopted CMG’s philosophy and it now has to win market share back as we head into tough times for restaurants.
Restaurant Stocks to Watch: Red Robin Gourmet Burgers (RRGB)
Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) is a burger joint that has been around for more than six decades, but only in the last couple decades has it really made a move across the U.S.
It started as a single shop in Seattle Washington in the 1940s. It has since moved its headquarters to Colorado, which gives it a more centralized perspective of its operations.
RRGB is known for its wide variety of burger toppings, its beer selection and its bottomless french fries. Its burgers have won the Zagat’s Best Burger title for three years running.
But the problem is, RRGB sells burgers. And burgers aren’t that hard to make — not a big barrier to entry from big and small competitors.
After years of aggressive expansion, it has slowed its expansion and now has to make the numbers work for its maturing stores in increasingly competitive markets.
Analysts are predicting that earnings will be off almost 20% for the current quarter and earnings per share will be off 37%. All this while carrying a forward price-earnings of 27. Not a good combination.
Restaurant Stocks to Watch: Norwegian Cruise Line (NCLH)
It may be odd to see Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) as a pick in a restaurant article. But what is a cruise but a bunch of floating restaurants and a captive audience.
You would think that cruising would be doing well now, with low gas prices. Cruise lines are more fuel intensive than airlines, so fuel costs are a big deal. And commodity prices are low, which helps their margins on their food.
But global instability means that fewer people are interested in moving around much. And outside the U.S., where economies are still struggling, vacations are becoming a bit simpler and closer to home.
NCLH also counts on its Mediterranean packages and given Syrian refugees flooding Europe, especially Mediterranean countries, that has also dampened business.
The stock is off nearly 40% this year and it’s not just NCLH. The whole cruise line industry is to be avoided right now.
Restaurant Stocks to Watch: Buffalo Wild Wings (BWLD)
Buffalo Wild Wings (NASDAQ:BWLD) or as it’s more familiarly called, “B dubs,” is one of the biggest wing joints in the U.S.
And while it was expanding and growing its franchise operation everything was good. But then last year there was a wings shortage, which drove prices up. And now, more and more people still want the wings, but they want to watch the game at home.
While hanging on to takeout sales is a good thing, it comes at the expense of people drinking in the restaurant. Drinks are the biggest margin items in the food service business and if that’s down, it’s not a good sign.
Again, the trend BWLD is falling victim to more than its same store sales is the fact that technology now allows restaurant goers to be less dependent on the massive selection of sports events in a B dubs restaurant.
Plus, when they get a takeaway order, there is no chance to sell those customers more food or drinks. The trend is not your friend in this stock.
Restaurant Stocks to Watch: Cheesecake Factory (CAKE)
Cheesecake Factory Inc (NASDAQ:CAKE) was launched in the early 1970s in Los Angeles. Now it has more than 200 restaurants around the world.
Beyond the cheesecake, CAKE restaurants offer a huge variety of foods and desserts on their menu. The problem is never finding something you like, it’s deciding among everything you like.
That has it’s plusses and minuses. And variety is a double-edged sword. Some people love leafing through the massive menu, others not so much. Its enormous food costs are something to watch if it food input prices increase, since it operates on relatively tight margins. It’s also not an alcohol-driven restaurant so it won’t see much revenue on that end.
Also, Texas, the Dakotas and Florida economies have been hurt by energy prices and Zika virus fears. The weak energy sector has meant lots of layoffs and relocations. Zika has scared tourists away. Neither of these bode well for CAKE. In the most recent quarter, traffic was down 2.7% and that will likely continue.
Restaurant Stocks to Watch: Shake Shack (SHAK)
Shake Shack Inc (NYSE:SHAK) is the newest hot burger joint to storm the U.S. and the stock market. Danny Meyer started the original in a small park in New York City and now has opened dozens of restaurants around the country.
Its biggest plus is its buzz as a hip, urban burger joint that offers quality as well as quantity for a slight premium. And it’s highly consumer friendly in the sense that its options are customizable to suit diners tastes.
The question is, whether SHAK, which is rocking a P/E of 90, has what it takes for the long run. It hit the market to great acclaim last year and went from $45 a share to $92 in a matter of months.
But it has cooled substantially since its launch, dropping 23% since coming public. Now that the initial fad is over, the question is whether diners will continue to seek out SHAKs or whether they turn their attentions elsewhere.
Add to that the threat that a secular recession for the industry would mean serious trouble for stock that has the P/E of small, promising biotech.
Restaurant Stocks to Watch: Bloomin’ Brands (BLMN)
Bloomin’ Brands Inc (NASDAQ:BLMN) owns and operates four restaurant chains: Outback Steakhouse, Fleming’s Prime Steakhouse & Wine Bar, Carrabba’s Italian Grill and Bonefish Grill.
All of these fall in the middle-market range, which is the spot in the market that may see the worst effects if the restaurant recession comes to pass.
You see, high-end brands won’t suffer as much because their clientele is more price elastic to begin with. And many are using the high-end restaurants to host business dinners and lunches.
The mid-range is where a large swath of U.S. consumers sit. They are much more price sensitive. And if prices rise or their wages stagnate, that steak dinner becomes steak on the grill at home very quickly. Once those new patterns of consumption are begun, they are hard to break unless there’s some significant change in the financial circumstances of consumers.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.