At the start of the pandemic, few investments seemed as risky as restaurant stocks. According to research published by Harvard Business School, two months into the pandemic, 40% of American restaurants were closed and 8 million employees were out of a job. That was three times the job losses experienced by any other industry. The National Restaurant Association projected an industry revenue shortfall of $240 billion in 2020.
However, the restaurant industry also proved resilient. There were bankruptcies — including some well known, national chains — but many restaurants successfully pivoted to takeout and outdoor dining. Now, with the country re-opening, hard-hit sectors are recovering.
Energy stocks have begun to rally. People returning to the office are picking up coffee again on their commute. Families are going to see movies. And these seven restaurant stocks are poised to benefit from the resurgence of dining out.
- Brinker International, Inc. (NYSE:EAT)
- Cheesecake Factory Inc (NASDAQ:CAKE)
- Darden Restaurants, Inc. (NYSE:DRI)
- Denny’s Corp (NASDAQ:DENN)
- Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH)
- Shake Shack Inc (NYSE:SHAK)
- Starbucks Corporation (NASDAQ:SBUX)
While times were tough last year, some of these restaurant chains are now stronger than ever and positioned to grow their business at a faster pace thanks to adaptations they put in place because of the pandemic.
Restaurant Stocks to Buy: Brinker International (EAT)
Brinker International is the owner of several restaurant chains, the most notable being Chili’s. The company owns over 1,600 locations. Casual dining chains like Chili’s were hit hard by the pandemic. Families stopped going out to eat, people stopped going out at night for entertainment, and office workers stopped going out for lunch. With business travel at a standstill, there was no-one staying at airport hotels and looking for a familiar spot for a meal and a drink.
As the end of January 2020 approached, EAT shares were worth nearly $46. By March 20, they were below $10. However, Chili’s worked hard to adapt. The chain “took the dining room to the parking lot” and was selling $1 million a week in margaritas to-go. In its most recent earnings, Brinker reported revenue down slightly from a year ago, reflecting “the continued impact from the COVID-19 pandemic.” That news was a big part of EAT stock sliding from its 2021 (and all-time) high close of $77.77 in March, to its current price in the $54 range.
That price — just slightly above its 2021 open — offers opportunity. Restaurant stocks like EAT are expected to climb as the pandemic recovery continues.
At the time of publication, EAT stock was rated “B” in Portfolio Grader.
Cheesecake Factory (CAKE)
Casual dining chain Cheesecake Factory was in real trouble in 2020. It was not only a sit-down restaurant chain, but most of its locations were in malls. The pandemic devastated dining room business and it killed off mall traffic — with many malls forced to close altogether during lockdowns.
After plunging last February, CAKE stock rallied, but then the company ran into an Securities and Exchange Commission investigation. The SEC ruled that Cheesecake Factory told investors its locations were “operating sustainably” when in fact it was losing $6 million a week and had told mall landlords it would stop paying rent.
The company reported its second-quarter 2021 earnings in July. Earnings and revenue beat estimates, thanks to indoor dining restrictions being lifted and its pandemic-kickstarted takeout operations performing well. Even now, takeout sales are double 2019 levels, which has opened up new business opportunity for this chain. The company even opened three new locations during the quarter. CAKE stock is currently trading in the $45 range, up 28% since the start of the year.
The Portfolio Grader rating for CAKE stock is currently “B.”
Restaurant Stocks to Buy: Darden Restaurants (DRI)
Darden Restaurants owns several fine dining restaurant chains and a half dozen casual dining chains. The one most people know the company for is Olive Garden.
Darden is turning into a post-pandemic success story. When the company reported fiscal fourth-quarter results at the end of June, it beat analyst expectations for both earnings and revenue. Darden said that same-store sales for its restaurants had nearly returned to 2019, pre-pandemic levels. In addition, management projected fiscal 2022 sales will top pre-pandemic levels. Naturally, DRI stock popped on that news.
Darden was already a solid performer among restaurant stocks. DRI posted growth of 188% in the decade leading up to the pandemic. It tanked last March, but has been rallying since then. At this point, investors have seen a return of 25% since the start of 2021.
DRI stock currently earns a “B” rating in Portfolio Grader.
With a focus on breakfast (including an all-day breakfast menu), in-store dining and many locations located near transportation centers, Denny’s had a tougher time than many restaurants during the pandemic. Even last August — when many other restaurants had successfully pivoted to takeout — Denny’s was making lists of chains most likely to fail.
Denny’s survived, and by spring, DENN stock rallied to near February 2020 levels. However, shares have taken a hit again after the company announced a stock offering in July. At this point, Denny’s stock is up slightly in 2021. It has potential to rally again if re-opening continues, travel picks up and dining room breakfast is once again in demand.
At the time of publication, DENN stock was rated “B” in Portfolio Grader.
Restaurant Stocks to Buy: Ruth’s Hospitality Group (RUTH)
The pandemic turned into the perfect storm for Ruth’s Hospitality Group, owner of the popular Ruth’s Chris steakhouse restaurants. Ruth’s Chris was focused on dining room service, not takeout. It had a large business clientele. The pandemic emptied out big city downtown districts and steamrolled business travel. That meant business lunches and dinners were done.
The company was forced to take dramatic steps to survive. This included closing 23 of its 135 U.S. Ruth’s Chris restaurants, with a focus on axing locations where takeout simply wasn’t viable. Staff were furloughed, while remaining staff and executives took pay cuts. In February 2020, RUTH shares were trading for over $22. Three weeks into March, they were approaching $4 — an 82% drop. The company even took a $20 million coronavirus Paycheck Protection loan, but ended up returning the money after public backlash.
Today, Ruth’s is in a much stronger position. Most of its restaurants are open, it has a takeout business that didn’t exist before the pandemic, and its financial situation is improving. In addition, the company is looking to the future with several new restaurants planned for this year and three or four more in 2022. As workers return to the office and business travel begins to return, the RUTH stock recovery (now up 386% from that March 2020 low) should gain steam.
The current Portfolio Grader rating for RUTH stock is “B.”
Shake Shack (SHAK)
Just like its home town of New York, Shake Shack was battered early on by the pandemic. While other burger chains were built around drive-throughs and thrived during lockdowns, Shake Shack locations were not. They were primarily located around urban downtowns and airports. Ground zero for business disruption. Shake Shack had to rely on curbside pickup and delivery services.
However, this company used the pandemic as a teaching moment to redesign its stores and it is in expansion mode. The first Shake Shack drive-though will open this year. In addition, the company says it plans to open up to 90 new locations in 2021 and 2022.
Currently trading at just over $100, SHAK stock is up 12% so far in 2021.
SHAK stock currently rates a “B” in Portfolio Grader.
Restaurant Stocks to Buy: Starbucks (SBUX)
Finally, the most ubiquitous chain on this list of restaurant stocks. With nearly 15,000 locations in the U.S., Starbucks has the country blanketed. Many of those locations are drive-throughs as well. Unfortunately for Starbucks, many companies opted to allow staff to work from home. That hammered coffee and snack sales at downtown locations, while also cutting sales at drive-through Starbucks stores as commuters left their cars in the garage.
In its first full quarter of the pandemic in 2020, the company said it had lost $3.2 billion in sales as a result.
It seems safe to say that the turnaround in Starbucks’ fortune is well underway. In its most recent quarter, the company reported revenue hit a record $7.5 billion. In the U.S., its same-store sales were up 83% year-over-year, and 10% over pre-pandemic levels. Starbucks kicked back into expansion mode as well, opening 352 net new stores during the quarter.
After a brief setback when the market crashed last March, SBUX stock quickly kicked back into growth mode. At this point, it’s up 14% in 2021. So far as restaurant stocks go, SBUX has been a model for long-term growth, with a trajectory that kicked off in 2009 and shows no sign of levelling off.
The current rating for SVUX stock in Portfolio Grader is “B.”
On the date of publication, Louis Navellier had a long position in DRI and EAT. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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