What happened

Shares of Jack in the Box (NASDAQ:JACK), Wendy's (NASDAQ:WEN), and Dine Brands Global (NYSE:DIN) all jumped over 10% higher Monday morning as investors seemed to shift from consumer staples stocks, which were largely flat Monday morning, into heavily sold off restaurant and fast-food stocks.

So what

The broader market gains -- the S&P 500 and Dow are both up almost 5% Monday morning -- could be from some positive news abroad: Italy, France, and Spain all reported a deceleration of new deaths from the COVID-19 coronavirus. But investors should expect more market volatility surrounding COVID-19 news and how policymakers try to offset its negative economic impact.

^SPX Chart

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Similar to Dine Brands in the graph above, most dine-in restaurant stocks have been clobbered, while fast food restaurants with more developed drive-through or carryout options have been more resilient against sell-offs. While many restaurants are trying to bolster their cash reserves by suspending dividends, drawing on credit lines, and slashing capital spending, it's also bringing up unique situations. One example of a unique scenario is an activist investor pushing Dine Brands to spin off IHOP pancake house in hopes its valuation would increase as its earnings potential, when separated from Applebee's, would outweigh their current synergies.

Wendy's reported to investors that its drive-through business has seen a large boost in demand and has grown to represent roughly 90% of its total sales mix. Despite seeing a boost in drive-thru and delivery business, Wendy's noted that same-store sales for the current quarter through March 22 were up 2.8%, but that the most recent week ended March 22 recorded a 20% same-store sales decline. Management also improved its cash position by drawing $120 million from its revolving credit facility, and is supporting its franchise network by extending payment terms and deferring base rent payments when possible.

Cheeseburger and fries on a plate

Image source: Getty Images.

COVID-19 and its negative economic impact come at a rough time for Jack in the Box. Management recently explored options that included selling the company before it decided to sell Qdoba, its Mexican restaurant brand, to Apollo Global Management. Further complicating things is a series of departures that includes CEO Lenny Comma, and a balancing act between opening higher potential stores but closing others.

Now what

The harsh truth is that many restaurant companies aren't prepared for such an immediate plunge in revenue. While history has shown us broader markets will rebound from developments like COVID-19, not all companies will be able to weather this storm. When searching for oversold stocks, investors would be wise to find companies similar to Wendy's, with an ability to partially offset lost dine-in sales with delivery and drive-through, an intact long-term growth story, and liquidity to survive the economic impact from COVID-19.