Restaurant stocks are surprisingly hanging on to most of the gains seen in January, even as the markets fall on recent banking issues, and the Fed's inflation fighting efforts.
Year-to-date a basket of 40+ restaurant stocks I track are up an average of about 18.5%, far ahead of the S&P 500 (up 3.3%), Russell 2000 (down 2%), and Russell Microcap (down 6.2%). However, it's not what you think. The rally is concentrated in smaller names.
This is not the environment that you would expect restaurant outperformance, with input and menu costs rising, and labor somewhat scarce. Yet consumers don't seem to mind all that much at this point. Just check out your local restaurants and drive-throughs, and consumers seem to still be trying to make up for being locked out during the pandemic.
The top performer remains Red Robin Gourmet Burgers (RRGB) (up 147%), which was one of last year's biggest losers (down 65%), and if you know the company's history, seems to be living out the fourth of fifth of nine lives. Red Robin missed fourth-quarter estimates badly ($1.35 loss per share versus $0.62 loss consensus), but upbeat company guidance, and a recent upgrade have the stock on the move. That's despite expectations that the company will lose money in 2023 and 2024.
It's the smaller restaurant names that are doing all of the heavy lifting at this point. The Big Five -- a self-coined group that includes McDonald's (MCD) (up 3%), Chipotle Mexican Grill (CMG) (up 18%), Yum! Brands (YUM) (flat) Domino's Pizza (DPZ) (down 9%) and Darden Restaurants (DRI) (up 10%) -- are up an average of just 4% for the year. The Big Five have an average market cap of just over $61 billion.
The top-five performers, on the other hand, have an average market cap of about $267 million. Besides Red Robin, the top five include Carrols Restaurant Group (TAST) (up 59%), which operates Burger King and Popeye's franchises, FAT Brands (FAT) (up 49%), Potbelly (PBPB) (up 42%), and Kurta Sushi (KRUS) (up 40%).
The bottom five include Sweetgreen (SG) (down 22%), Noodles & Company (NDLS) (down 10%), Domino's Pizza (DPZ) (down 9%), Cannae Holdings (CNNE) (down 7%), and Wendy's (WEN) (down 7%). ( I'm still upset by Wendy's recently discontinuing their Italian Mozzarella Chicken Sandwich, which was outstanding IMHO).
If we were to weight returns by market cap, the story would be entirely different. Perhaps I will do just that in my next restaurant update.
(Please note that due to factors including low market capitalization and/or insufficient public float, we consider several of these names be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)