While virtually every business sector suffered devastating losses during the initial onslaught of the novel coronavirus pandemic, among the worst-hit industries was food services. Suddenly, once-popular eating establishments found themselves staring at zero traffic, sending restaurant stocks cratering. Fortunately, gradual acclimatization and the vaccine rollout helped bring the sector back from the brink. However, economic woes may challenge this trajectory once again.
According to a Washington Post article, within the less-than-encouraging September jobs report was an even uglier detail: per the Bureau of Labor statistics, “food services and drinking establishments added just 29,000 jobs, after shedding 24,700 jobs in August.” For many eateries, the biggest problem is the lack of staff. Thus, the poor momentum in food-services-related jobs growth bodes poorly for restaurant stocks.
And those hoping that this circumstance will improve probably shouldn’t hold their breath. One of the common political arguments against government stimulus checks was that it promoted laziness within the broader workforce. However, both academic arguments and now a poor jobs report following the cessation of government support put a dent in such thinking. Most significantly, another Post article indicates that Americans are finding creative ways to survive post-Covid, again boding poorly for restaurant stocks.
Further, a series of tough economic nuances put the food services industry in a unique bind. Restaurateurs have cited higher food and utility costs as major contributors to sustaining the bottom line. As well, the ebb and flow of new Covid-19 infections have clouded restaurant stocks. True, cases are declining now, but with the introduction of another new variant, the mood couldn’t be more worrisome.
To be fair, it’s probably not a good idea to short this or any other sector. The turbulence in the domestic and global economy has sparked a landscape where anything and everything can happen. However, it might be time to trim some of your holdings on these restaurant stocks.
- McDonald’s (NYSE:MCD)
- Domino’s Pizza (NYSE:DPZ)
- Papa John’s (NASDAQ:PZZA)
- Dave and Buster’s (NASDAQ:PLAY)
- Ruth’s Hospitality (NASDAQ:RUTH)
- Chipotle Mexican Grill (NYSE:CMG)
- Shake Shack (NYSE:SHAK)
On a final note before we dive into individual restaurant stocks, personal consumption expenditures in food services during the second quarter of 2021 has only increased by 0.9% against the pre-pandemic high recorded in Q4 2019. That indicates pedestrian gains, which further clouds the segment.
Restaurant Stocks to Closeout On: McDonald’s (MCD)
Before you get upset at me, just know that I have personal difficulties with including McDonald’s on a list of restaurant stocks to avoid. In prior articles, I mentioned that the Golden Arches commands a globally recognized powerhouse brand, one that continues to generate robust earnings. Furthermore, it’s a great company if you’re seeking long-term dividends.
Let’s face it: McDonald’s has frequently courted controversy yet people continue to pile into their stores and their drive-through lanes like addicts. But if you were simply buying restaurant stocks for their capital gains potential, you might want to ease off MCD and look to other sectors for growth.
Fiscally, while the fast-food icon stands poised to deliver revenues exceeding its 2018 and 2019 tallies, that’s not saying much. For instance, in 2013, McDonald’s posted revenue of over $28 billion. Unless a miracle happens, 2021 is unlikely to challenge that figure.
Also, its workers are among the low-paid service industry laborers that are quitting across the nation. It’s a story about people taking back their power and demanding better working conditions and higher salaries. If successful, though, MCD might not be as attractive to shareholders.
Domino’s Pizza (DPZ)
Not that I’m hawking the Post, but its team of writers and editors have been coming up with intriguing headlines related to restaurant stocks. A few days ago, the newspaper warned that there’s “no one to deliver the pizzas.” What has the world come to?
As you may be aware, Domino’s Pizza — the world’s largest pizza company — “posted its first decline in U.S. same-store sales in more than a decade. These results came as a shock to analysts and investors, who were expecting continued growth while the pandemic supercharges demand for takeout and delivery meals.”
But demand might not be the biggest headwind, stated the Post. Instead, “a dearth of delivery drivers — amid a national shortage of workers — could be what’s eating into Domino’s sales.” As referenced earlier, the politically motivated narrative is that those drivers stayed at home because collecting government checks was more lucrative than actually working.
However, the latest jobs report suggests that might not be the case. It’s possible that people are tired of dealing with crummy work. Of course, Domino’s could make its jobs more appealing but that’s going to cost money, which might not appeal to Wall Street.
Restaurant Stocks to Closeout On: Papa John’s (PZZA)
Among the two publicly traded pizza giants, Papa John’s was looking the sour of the pair due to what I’ll just call some unfortunate PR missteps.
That should cover the issue in the most diplomatic manner possible. Anyways, the company fought hard to rebrand itself as well as provide distance from its founder John Schnatter. Remarkably, despite the toxicity of the aforementioned incident, PZZA performed outstandingly. However, this latest controversy regarding workers’ rights has found Papa John’s struggling alongside most other restaurant stocks.
Similar to rival Domino’s Pizza, shares of PZZA have been printing red ink in recent sessions. Over the trailing month to the beginning of the Oct. 22 session, the equity unit dropped over 6%.
Of course, that in and of itself isn’t a major deal. But if the delivery driver situation can’t be effectively resolved, Papa John’s may incur an opportunity cost. That’s because we’re in the middle of football season and none of these fast-food companies can afford ticking off their customers during this high-spending period.
Dave and Buster’s (PLAY)
Another company that I’ve struggled with regarding this list of restaurant stocks is Dave and Buster’s. An immensely popular hangout for the working stiff, the company provided a way for cubicle warriors to let off steam. Trust me, sitting in front of your computer all day inputting data points into an Excel spreadsheet is not a normal human activity.
However, when the Covid-19 crisis shuttered corporate offices, the narrative for PLAY stock absolutely cratered. In its fiscal year ended Jan. 31, 2021, it rang up $436.5 million, a staggering 68% loss from the prior year. But due to society reopening, many contrarians piled into PLAY, anticipating a return to normal.
Unfortunately, the return to the office has been plagued in part by what CNBC and others termed the Great Resignation. Particularly impacted are jobs in the food services sector, which imposes a dark cloud over virtually all restaurant stocks.
While it’s true that retail revenge has people clamoring to make up for lost time, Dave and Buster’s might be too mundane of an attraction, especially with the money Americans saved up during the worst of the pandemic.
Restaurant Stocks to Closeout On: Ruth’s Hospitality (RUTH)
If you had to pick a name to buy among restaurant stocks, you probably would consider Ruth’s Hospitality. The largest fine dining steak house company in the U.S. and the owner of the world-famous Ruth’s Chris Steak House brand, if any food-services company were to prosper in this malaise, Ruth’s should be it.
Throughout the lockdowns, the media reported that Covid-19’s beneficiaries were the wealthiest. Sure enough, data from the Board of Governors of the Federal Reserve System revealed that the wealth gap widened considerably between the very rich and pretty much everyone else. Given that this is the case, RUTH stock should be performing reasonably well.
Certainly, the equity unit popped higher from last year’s March doldrums. But where it trades at the time of writing (a little over $19), RUTH now commands a price lower than right before the pandemic. If anything, this backdrop speaks to the ambiguous nature of the economy.
Yes, things have improved from the worst of times. But even for well-to-do folks, sentiment has not yet returned to normal.
Chipotle Mexican Grill (CMG)
I’m leery about putting Chipotle Mexican Grill on this list of restaurant stocks to be cautious of, but this time for personal reasons. Years ago, I’ve made cautious — okay, bearish — takes on CMG only to get scorched as you can see from the charts. Naturally, I want to avoid the same thing happening again.
And believe me, I get why Chipotle has been a standout performer among restaurant stocks. In 2020, the company posted revenue of nearly $6 billion, which was up — you read that correctly, up — 7% from 2019’s sales tally. Further, this year should be a massive one, with its trailing-12-month haul in the stratosphere at $6.8 billion.
But then again, this is old news. As financial analysts state, the market is forward looking. In other words, what does Chipotle have planned that would justify its time-of-writing price of $1,774? To me, it sound like more of the same, which is fine, but not 90-times earnings fine. Please note that Gurufocus.com states that CMG is significantly overvalued.
From a premium perspective and from the fact that people just don’t want to work in menial jobs anymore, I’d be cautious on this one.
Restaurant Stocks to Closeout On: Shake Shack (SHAK)
One of the trendiest companies on this list of restaurant stocks, Shake Shack was among the sector’s biggest beneficiaries of post-Covid speculation. Yes, SHAK sank into the abyss during the worst of the coronavirus pandemic, at a time when people genuinely thought we were going to enter a depression. But as broader acclimatization and the vaccine rollout hit the streets, SHAK veritably skyrocketed.
In early February, Shake Shack commanded a definitive three-digit price tag. Since then, however, the air has gone out of the tires. Over the trailing six months, SHAK hemorrhaged nearly 35% of market value, the complete antithesis of its performance in the second half of 2020. Assessing the shifts in the labor force, I’m not sure if SHAK is worth buying as a contrarian opportunity.
Mainly, the company is overvalued on a price-to-book and price-to-sales basis relative to other restaurant stocks. What’s more, its present profitability metrics are worrying. Sure, Shake Shack is a great brand, but it’s been posting negative operating margins for several quarters until Q2, 2021. And if workers demand better conditions and more pay, that’s going to eat into an already delicate situation, no pun intended.
On the date of publication, Josh Enomoto did not have (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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.