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Why Shake Shack, Wendy's, and Yum! Brands Stocks Popped Today

By Rich Smith - Apr 8, 2020 at 5:07PM

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Investors are unfazed by a McDonald's report.

What happened

Shares of fast-food restaurant stocks including Shake Shack (SHAK -1.98%), Wendy's (WEN -1.63%), and Pizza Hut owner Yum! Brands (YUM -2.37%) surged in early trading Wednesday, and were holding on to the majority of their gains as they moved toward the final hour of the trading day.

As of 2:55 p.m. EDT, Shake Shack shares remained up 10.1%, Wendy's was looking nearly as strong with a 9.2% gain, and Yum! was looking pretty appetizing as well -- up 5%.

A chalkboard drawing of a stock chart, with an arrow going up being erased, then pointing back down

Restaurant stocks went up today. But could they be heading back down? Image source: Getty Images.

So what

Late yesterday, Dr. Anthony Fauci, director of the U.S. National Institute of Allergy and Infectious Diseases, predicted that "by the time we get to the fall ... we will have this [pandemic] under control ... no absolute prediction, but I think we're going to be in good shape." This prediction, combined with similarly upbeat commentary yesterday from politicians leading the coronavirus fight at state and national levels, appears to be the driving force behind stock prices' revival today.

In fact, it may be the only reason that restaurant stocks are going up today -- because judging from what we saw in McDonald's latest announcement, things aren't looking too good for the industry right now. Same-store sales in March plummeted 22% at the fast-food giant. And management admitted that "the global outbreak of COVID-19 has significantly disrupted the McDonald's business," forcing the closure of 25% of the company's locations, and causing McDonald's to withdraw its full-year guidance barely a month after it was first issued.

Now what

So is the rally in restaurant stocks justified, in light of McDonald's worrying news, and its even more worrisome guidance retraction?

I think it may not be. Consider that while Yum! stock doesn't look too overvalued today based on its trailing price-to-earnings ratio of 17, that number could run much higher (that is, the stock would look much more expensive) if earnings take a hit in the next couple of quarters (which you'd expect to happen in the middle of a recession). At the same time, Wendy's stock already looks very expensive at 33 times earnings, and Shake Shack...well, Shake Shack doesn't have any earnings.

Yes, if things are starting to turn around in the war against coronavirus, there's a chance things could turn out better for Shake Shack, Wendy's, and Yum! than they did for McDonald's this morning. On the other hand, the latest data I'm seeing shows confirmed COVID-19 infections approaching 1.5 million worldwide, with deaths near 87,000, and a reacceleration in the rate of new infections being reported daily -- both in the U.S. and worldwide.

Call me a pessimist, but I don't think any of that bodes very well for a quick end to this crisis, nor a sustained revival in the fortunes of restaurant stocks.

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Stocks Mentioned

Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
YUM
$113.48 (-2.37%) $-2.76
The Wendy's Company Stock Quote
The Wendy's Company
WEN
$18.72 (-1.63%) $0.31
Shake Shack Inc. Stock Quote
Shake Shack Inc.
SHAK
$40.20 (-1.98%) $0.81

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

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