Restaurant stocks have been among the hardest hit from the COVID-19 shutdown. As governments ordered restaurants to stop seating customers, the market responded by whacking the stocks.
Imagine you are a shareholder in Ruth’s Hospitality, the parent company of the Ruth’s Chris Steak House chain. The stock was almost obliterated in a month, falling from a closing high of $23.83 on Feb. 20 to a shocking intraday low of $2.32 on March 18, a 90% loss. Other restaurant stocks were hit almost as hard. Bloomin’ Brands, owner of Outback Steakhouse and several smaller chains, dropped from a closing price of $22.95 a share on Feb. 20 to a dismal intraday low of $4.54 on March 17. Even the high-flying chicken wing superstar Wingstop saw its stock cut in half in the span of a month.
Not surprisingly, all three stocks have bounced back in a big way.
|Stock||Closing Price Feb. 20||Intraday Low March 18||Closing Price April 9|
|Ruth’s Hospitality (NASDAQ:RUTH)||$23.83||$2.32||$8.69|
|Bloomin’ Brands (NASDAQ:BLMN)||$22.95||$5.00||$9.12|
Bottom-fishers have already seen big rewards for jumping in during those dark days. Over the last month, shares of Bloomin’ Brands and Wingstop have doubled off their lows, and Ruth’s Hospitality stock has almost quadrupled. Can these stocks keep climbing? What will the rest of 2020 bring? Let’s dig in.
Why did the market smack this dominant chicken wing franchise?
It’s actually surprising that Wingstop fell as much as it did. This is not an expensive dine-in steak house. It’s a takeout joint where you go to get amazing wings. And yet its stock plunged along with the rest of the restaurant sector. In retrospect, all that market negativity was pure speculation. The chain remained open for takeout. Indeed, 80% of its business is based on takeout. So why would the quarantine affect its sales? People still have to eat, right?
Sure enough, the king of wings just gave us a peek at its first-quarter numbers, and the chain is crushing it. Same-store sales grew almost 10% for the quarter, despite the shutdown. This business has been almost completely unscathed by COVID-19.
Wingstop has over 1,300 locations worldwide, and has been opening more than 130 restaurants a year. The ultimate plan is to get to 6,000 locations worldwide. “Chicken is the most popular protein around the world,” said CEO Charlie Morrison in a 2018 interview with The Associated Press. “It’s a very easy product to take globally.”
The fast-food chain is highly popular with millennials. The rapper Rick Ross owns a reported 30 Wingstop franchises, primarily in the South. He’s a vocal supporter of the brand, often rapping about his favorite flavor (lemon pepper).
The stock has more than quintupled from its 2015 IPO price of $19. That easily stomps the S&P 500, which has risen 34% in that time frame. While the shares are not cheap, this is a very strong fast-food concept with a lot of room to grow.
Steak houses are ramping up
While the most valuable restaurant stocks are fast-food concepts that have low prices and enjoy frequent patronage, in the short term, upscale steak houses could benefit the most when our economy reopens for business. Shares of steak house chains had an absolutely dreadful March. Consider that even though Bloomin’ Brands stock has doubled off its low, and Ruth’s Hospitality has almost quadrupled off its bottom, both stocks are still down more than 50% from the highs set back in February.
Indeed, both stocks are trading in lockstep. That’s because the COVID-19 pandemic is by far the most relevant criterion for these stocks at the moment. An investment in Ruth’s Hospitality or Bloomin’ is as much a call about COVID-19 as it is about the steak house chains. If you’re buying the steak houses, you’re also confident that our society will get back to normal sooner rather than later.
Last week, shares of Ruth’s Hospitality and Bloomin’ Brands both surged more than 50%, on the hope that restaurants will start to reopen in a few weeks. If that hope is dashed, the stocks will crater (again). But if the optimists are right, the stocks could easily continue rising, maybe all the way to historic price levels (roughly a double from here).
Investors who are still pessimistic about COVID-19 — and who believe social distancing might be a new normal for our society — ought to steer clear of the steak houses. If you don’t see anybody having a night on the town in 2020, don’t invest here. But you may very well want to buy shares of Wingstop. Because people need food, even in a pandemic. And takeout is their business.
Source: Thanks https://www.fool.com/investing/2020/04/11/3-top-restaurant-stocks-to-buy-in-april.aspx