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  1. Home
  2. / Investing
  3. / Stocks

Let's Chew on What's Up With the Restaurant Sector, Shall We?

Many restaurant stocks performed well in 2021 despite rising costs and labor issues, but this year could be more challenging.
By JONATHAN HELLER
Jan 05, 2022 | 09:30 AM EST
Stocks quotes in this article: SBUX, MCD, CMG, YUM, DPZ, DRI, KURA, STKS, BBQ, FAT, BFI, TAST, EAT, LOCO, SHAK

The labor shortage is hitting home in many places, including our small town. I noticed recently that our Starbucks (SBUX) has closed. Normally, this location is buzzing, and that's despite another strip mall location about a mile away. Now, this does not bother me one bit; I am not a fan of Starbucks coffee. However, this does raise a lot of questions as we enter 2022, especially within the restaurant sector.

In review, 2021 was an interesting year for restaurants, and one where you realize how much we take for granted. It was no longer as simple as hitting the local drive-thru and quickly getting your order. I can't tell you the number of times that I found places closed or waited more than a half hour for a drive-thru order. Those admittedly are "first-world" problems, and if they taught me some patience or more appreciation, that is a good thing and a lesson well-learned.

If disruptions hurt the industry, you could not tell based on 2021 restaurant stock returns. A basket of 40-plus restaurant stocks I follow were up an average of about 33% for the year versus 28.7% for the S&P 500, 14.8% for the Russell 2000 and 19.3% for the Russell Microcap Index. All things considered, not a bad year in difficult circumstances.

The "Big Five" -- a self-coined group that includes McDonald's (MCD) (up 27%), Chipotle Mexican Grill (CMG) (up 26%), Yum Brands (YUM) (up 30%), Domino's Pizza (DPZ) (up 48%) and Darden Restaurants (DRI) (up 29%) -- were up an average of 32% for the year.

Top performers for the year were all small and microcaps and included Kura Sushi (KURA) (up 315%), The One Group Hospitality (STKS) (up 241%), BBQ Holdings (BBQ) (up 225%) and FAT Brands (FAT) (up 105%).

The worst performer was busted IPO BurgerFi International (BFI) (down 59%), which I'm keeping an eye on as a potential turnaround play. I just don't have any idea when BFI might become profitable, and the only analyst covering it is projecting losses through 2022. In terms of worst performers, that was followed by Carrols Restaurant Group (TAST) (down 46%), Brinker International (EAT) (down 35%) and El Pollo Loco (LOCO) (down 22%). Even Shake Shack (SHAK) (down 15%) had a rough year.

As we enter 2022, there are reasons for optimism, including the potential end of the pandemic and pent-up demand by consumers, and reasons for pessimism, among them rising supply and labor costs, labor shortages and supply issues. Those factors should make this one of the most interesting years for the sector in recent memory. Overall, I am more pessimistic, and if anything will concentrate on individual names that become mispriced.

Brinker is a member of my 2022 Tax Loss Selling Recovery Portfolio and so far has done its job (up 9%), but it is early.

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At the time of publication, Heller was long EAT.

TAGS: Investing | Stocks | Consumer | Food & Drink | Restaurants | Real Money

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