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I have a soft spot in my heart for fishermen. It's one of the most classically romanticized vocations one can have. And Deadliest Catch episodes certainly don't hurt the image, either. So when I see photos of lobster boats camped in the bays, refusing to challenge the open seas because market prices are too low, a part of me feels the pain of the grizzled seaman. But then I remember I am a capitalist, and from the misfortune of others, I derive opportunity.
Stop being so shellfish
It's not you, the omnivorous creature who loves a good crustacean. And it's not the corporations demanding unreasonably low dock prices. It's nature that is at fault here. If you remember this winter (it was a long time ago), you may have noticed that you weren't shoveling snow quite as often. If you live in Florida, you probably only brought out the velour pants once or twice the whole season! Well, you weren't the only one celebrating the benefits of global warming -- the lobsters left their velour pants in the attic this year, too.
The warm waters gave lobster numbers a major boost, causing prices at the dock to fall steeply. At a nearly 30-year seasonal low, lobster is fetching as little as $1.25 per pound, according to The Wall Street Journal. It's hurting the fishermen in a big way, as they can't turn a profit on such low prices. But before you cry for our yellow-coated brethren, think about what this means for lobster retailers.
Mmm… cheddar biscuits
Lobster is a dish for the wealthy. Its deliciously tender meat rivals that of a succulent Wagyu filet. And as if it isn't mouth-watering enough on its own, we use movie-theater-style butter to make it the epitome of American class. Yet some restaurants don't want this elitist image for the red-shelled aliens. Darden Restaurants' (NYSE: DRI ) Red Lobster is home of the people's lobster, served with cheesy biscuits. Recent advertisements show four-course lobster-laden meals at prices so appealing it may overshadow the fact that you're in a Red Lobster. Entrees go for anywhere from $11 to $30, depending on how loco you go. So with lobster prices so ridiculously low, Darden should be seeing expanding margins.
The company's Olive Garden brand has seen mediocre growth, but in Red Lobster, we see the benefits of low dock prices. Same-store sales growth is in the double digits for the Lobster, which is pretty impressive for a long-established, typically low-margin restaurant chain.
Darden's higher-priced chains, such as The Capital Grille, which can fetch as high as $50 or $60 for an entree, will undoubtedly see similar profit expansion (unless offset by otherwise high agriculture prices).
Ruth's Hospitality Group (NYSE: RUTH ) runs two chains that will also benefit from the lobster army dancing idly off the shores of Maine. The well-known upscale steak house, Ruth's Chris, and the more casual and accessible Mitchell's Fish Market both stand to profit from lower costs. That said, it's worth it to note that increasing beef prices will offset gains made in seafood.
The parent company is still below its 2007 sales levels, but things are picking up. The steak house chain has enjoyed eight consecutive quarters of revenue growth.
Where's the buy?
Both companies are relatively well-diversified in their offerings, with Darden leading the way. Both Ruth's and Darden are cheaper than restaurant power plays like McDonald's (NYSE: MCD ) or Chipotle (NYSE: CMG ) .
McDonald's, though less volatile and a dividend-payer, trades at around 15 times forward earnings. Compare that to 11.3 for Darden, and 11.8 for Ruth's Hospitality. Chipotle is, as per usual, given a premium at 35 times forward earnings.
Taking a look at the chart below that shows the stock price of each company over the last six months, it looks like things are on the up for Darden, which is still much cheaper than its value-oriented rivals. McDonald's, a company I love, is surprisingly the worst-performing stock.
Under the sea
If the scientists are successful in reversing the oft-challenged phenomenon of global warming, then the lobsters are in for a rude awakening. Darden will likely feel the pain as well, though not as fatally. But, with the way things are going, it doesn't seem likely that we will stop ruining the planet anytime soon, which bodes well for the seafood retailers.
Darden and Ruth's Hospitality have their fair share of bulls and bears. McDonald's and Chipotle tend to be the favorites overall, though. In this special free report, our analysts explain why McDonald's -- along with two other companies -- is set to dominate the world. It's free, and more than worth your time.