Most Restaurant Stocks Remain Tough to Swallow

 | Sep 18, 2017 | 10:00 AM EDT
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Strange things seem to happen when I go to Canada. Last year, a group of friends and I headed north to a small Island on the St. Lawrence River accessible by boat only to put a new roof on a cabin. That happened to be the day the Brexit story broke. Fast forward 15 months and we headed north again this past Friday to roof a second structure. On this trip we got word about the London Tube bombing after our very early a.m. departure. It's a strange world that keeps getting stranger.

Meanwhile, three days on a hot roof left us several pounds lighter, and as we scarfed down sandwiches at a Subway on our way home the talk ultimately turned to restaurants and restaurant stocks, which was perfect given my column last Thursday and today's follow-up. As usual, I was able to bore my buddies with my theories about the restaurant space and why restaurant stocks are having a rough year. 

As mentioned last week, despite decent gains by four of the "Big Five" restaurant names year to date and a decent run for some restaurant names last week, many restaurant chains further down the market cap ladder have had tough years. Part of the recent carnage and mini-recoveries are related to the impacts of Hurricanes Harvey and Irma as well as the aftermath.

Fiesta Restaurant Group Inc. (FRGI) rallied 14% last week and 7% on Friday alone due to a report that all but one of the company's 43 Houston-area Taco Cabana locations had reopened after Harvey and that 119 out 149 Florida and Atlanta-area Pollo Tropical locations had reopened after Irma. Still, the stock is down 39% year to date.

Chuy's Holdings Inc. (CHUY) , which also has a relatively large presence in the Houston area and Florida, rallied 9% last week but is still down 39% year to date. Zoe's Kitchen Inc. ZOES, a personal favorite in which I recently took a position, is down 45% YTD though it was up about 4% last week.

Ruby Tuesday Inc. (RT) , down 30% year to date, continues to suck wind, and the only money to be made here, if there is any, likely would be as a result of a transaction, whether that means taking the company private, converting it to a real estate investment trust or some other chain taking it out. This was the basis of the position that I took in the name, but the story and its outcome keep getting pushed out. Ruby Tuesday has been under "strategic review" for months and the only thing interesting here remains the company-owned real estate. This is a special situation where the odds of a favorable outcome for shareholders grow longer by the day.

Names in the market cap range of $100 million to $500 million that are in positive territory for the year to date are few and far between. Nathan's Famous Inc. (NATH) is up about 9%, while Noodles & Co. (NDLS) is up 7%. The latter has been struggling the past several years. This was a $40-plus stock in 2013 that now seems to trade more like an option on company survival. Noodles & Co. has not had a profitable year since 2014 and now trades in the $4 range.

Here is how others have fared for the year to date:

  • El Pollo Loco Holdings Inc. (LOCO) , down 4%
  • Habit Restaurants Inc. (HABT) , down 23%
  • Del Frisco's Restaurant Group Inc. (DFRG) , down 16%
  • Potbelly Corp. (PBPB) , 10%
  • J. Alexander's Corp. (JAX) , down 8%
  • Jamba Inc. (JMBA) , down 12%
  • Fogo de Chao (FOGO) , down 14%
  • Bojangles' Inc. (BOJA) , down 25%

Without a doubt, the sector remains troubled, but nonetheless interesting.

One observation made during our roofing adventure is that compressed air may be the eighth wonder of the world. The Porter Cable -- owned by Stanley Black & Decker Inc. (SWK) -- compressor/roofing nail gun we used this time around instead of doing all nailing the old-fashioned way saved a great deal of time and wear and tear on group of five whose average age is 57.

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