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Should I Buy Restaurant Stocks Now?

By Jennifer Saibil - Updated Mar 16, 2020 at 7:27AM

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With the stock market on shaky ground and people practicing "social distancing," restaurant stocks are getting hit hard.

Schools are canceled, the National Basketball Association has suspended its season indefinitely, and people are electing to stay home. What that means is that aside from general plunging stock prices, restaurants are also dealing with fewer customers. 

While some industries are less directly affected by the COVID-19 pandemic, restaurants are feeling the heat first-hand. Does that mean it's time to get out of the kitchen?

How it's playing out in real time

As the market sinks further into bear territory, restaurant stocks have seen their prices dive. People are fearful of being anywhere that's largely social, especially when it comes to food, which from the get-go needs effective germ-repelling practices. There's not so much that restaurants can do to bring customers back in the short term.

Inside of a Starbucks.

Image source: Starbucks.

Starbucks (SBUX -0.65%) stock is now down more than 25% from its 2020 high, Chipotle Mexican Grill (CMG 1.50%) more than 30%, and Texas Roadhouse (TXRH 0.62%) more than 40%. Restaurants that have strong takeout and delivery businesses are faring better. Domino's Pizza (DPZ 0.97%) is down less than 10%, McDonalds (MCD -0.21%) lost only about 13%, and Dunkin' Brands Group (DNKN) has decreased about 18%.

The big problem for restaurants like Chipotle and Texas Roadhouse is that they're meet-and-gather types of establishments, and no one is having a party these days. Chipotle is also dealing with the departure of founder Steve Ells, who recently stepped down from the board, which may be unsettling to investors. Chipotle is now trying to expand its pickup and delivery services, which should help drive sales as people avoid eating out.

Opportunity knocks

Despite the current market concerns, these are all excellent companies with healthy business models and solid metrics. In the short term, revenue could slide as customers choose to stay home. But as the market corrects, their share prices should rebound. That makes buying them at low prices especially attractive. While the market is in flux, an average recession lasts about a year and a half. If a recession does occur, investors who buy shares of these great companies should be prepared to wait it out while holding on to long-term goals. 

One case in point is Starbucks, which has the advantage of having already experienced the coronavirus effects with its stores in China. The company did have to close stores, but they were reopened within weeks and 90% are now operating as the spread of coronavirus has slowed in China. CEO Kevin Johnson has said that Starbucks would assess the U.S. stores on a case-by-case basis and close them if necessary, but there's no reason to think this will hurt Starbucks' sales for a lengthy period of time. Starbucks' U.S. comps have been phenomenal recently, and the company is working out solutions to stay open and provide pickup services.

Restaurants that deliver, such as Domino's, are in less peril even during this time. Domino's has seen great success from its e-commerce system pizza orders, with half of global sales coming from e-commerce options in 2019.

Some silver from behind the clouds?

If the global economic turmoil causes a recession, fast food will still be one of the ways consumers spend. The industries that suffer the least during recessions are consumer services and non-durable goods, according to Deloitte. People need to eat no matter what, and a pizza delivery or mocha latte are some of the cheaper ways consumers can indulge. That means fast food companies, especially the big ones that have large and loyal customer bases in addition to healthy income statements, should be able to weather the storm. As prices plunge, this is a great time to pick up shares of great companies for long-term prosperity.

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Stocks Mentioned

Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
$1,348.94 (1.50%) $19.92
Starbucks Corporation Stock Quote
Starbucks Corporation
$77.61 (-0.65%) $0.51
McDonald's Corporation Stock Quote
McDonald's Corporation
$247.39 (-0.21%) $0.51
Dunkin' Brands Group, Inc. Stock Quote
Dunkin' Brands Group, Inc.
Domino's Pizza, Inc. Stock Quote
Domino's Pizza, Inc.
$400.38 (0.97%) $3.83
Texas Roadhouse, Inc. Stock Quote
Texas Roadhouse, Inc.
$77.43 (0.62%) $0.48

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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