The Publicly Owned Restaurant Industry Is Not Monolithic

American markets today, Friday, viewed several hours before the 9:30 a.m. EST opening, appear poised to start on a positive footing. The S&P 500 and Dow are positive at time of writing while the Nasdaq is negative but struggling to climb and could very possibly make it into the green by or before market opening.

That follows yesterday’s session in which the Dow and S&P 500 hit record closes for the third day in a row, driven by technology stocks such as Apple Inc., Alphabet Inc. and Facebook Inc. The reasons are easily defined, according to Terry Snowden, chief equity strategist at U.S. Bank Wealth Management. “(Today) the S&P 500 reached another all-time high and is at an all-time high for good reasons,” he said in a Reuters report. Earnings are trending higher, interest rates are low and inflation remains moderate, he explained.

Canadian markets are poised for a strong start with the TSX 60 firmly rooted in positive territory.

European markets are open at time of writing and all indices there are strongly in the green.

Amongst precious metals, the safe havens of gold and silver are up.

Amongst currencies the Euro and Canadian dollar are up while the British pound sterling is down against the American dollar.

In previous editions of this column, I have suggested investment sectors and trends that merit at least some consideration in investment portfolios. Restaurants have both suffered acutely with the pandemic and improved strongly with the recovery. As with other sectors, understanding and investing in restaurant stocks means understanding the different sub-sectors and how they fared in the pandemic and the recovery explains Paul DeSisto, Executive Vice President at M&R Capital in Summit New Jersey. “The publicly-owned restaurant industry is not monolithic and can be divided into three types,” he says.

The three types are:

  1. Simple straightforward fast-food outlets, typically offering drive-through service and including McDonalds Corp., the Wendy’s Co., Restaurant Brands International Inc., Yum Brands Inc., and others.
  2. Fast Casual outlets which offer seating but not full table service and advertise higher quality food than straightforward fast-food outlets. This is an intermediate concept between fast food and casual dining and includes Shake Shack, Starbucks Corp. and Chipotle Mexican Grill Inc.
  3. Casual Dining outlets which serve moderately priced food in a casual atmosphere. Except for buffet-style operations they typically provide full table service and include Brinker International, Dine Brands Global Inc. and Darden Restaurants Inc.

DeSisto explains that during the early part of the pandemic with fear of the Covid 19 virus at its peak, the straightforward fast-food outlets performed best as they could close their indoor facilities and offer the full menu through drive through windows.

However, now that we are in recovery mode, the picture has changed. Goldman Sachs reports that Casual Dining leads the way on re-opening strength (31%) followed by Fast Casual (22%) with Fast Food (12%) lagging the group.

“This makes sense as the previously closed fast casual and casual restaurants would take some market share from fast food,” he explains.

To stake out market share, these companies are ramping up loyalty programs and digital engagement strategies. “Those are two of the trends that seem to be helping a lot,” he says.

All three segments face the same threats in the recovery:

  1. Inflation driving up food costs and wages
  2. Hesitation of workers returning to work
  3. COVID 19/Delta variant-related lockdowns

In the simple straightforward fast-food category, DeSisto picks McDonald’s Corp. “The company is making headway in the chicken sandwich wars and is now in second place at 27% behind Chick-Fil-A’s 41%” he says. McDonald’s closed yesterday at $236.51, up $0.96 on the day.

He also points to Yum Brands but says investors might want to wait for a pullback. Yum Brands closed yesterday at $133.33, down $0.72 on the day.

In the casual dining category, he likes Darden Restaurant Group which owns Olive Garden, Bahama Breeze and the high-end Capital Grille. It closed yesterday at $142.06, up $0.97 on the day.

He also includes Denny’s Corp. “Denny’s is the classic 24-hour per day restaurant chain and suffered mightily during the shutdown with its over exposure to certain markets like California and the Boomer demographic,” DeSisto says. Now, Denny’s has attracted an outperform rating and price target of $19 from Wells Fargo. Denny’s was trading in the mid-twenties before the pandemic and closed yesterday at $16.35, up $0.19 on the day.

The moral of this particular investing story is that investing in a large sector – in this case restaurant companies – means examining sub-sectors and may include a form of before and after snapshot.

Related: The Clues About the Continuing Impact of the Pandemic Continue Looking Mixed

Disclosure: I do not own any shares in any company mentioned in this column.

Al Emid is a financial journalist broadcaster and author. His next book. The 2022 Emid Report on Volatility provides a map for navigating market tumult and is scheduled for release in January 2022.