What happened?
Shares of restaurant stocks are surging today on news that the Federal Reserve is taking more action to help provide access to capital for more businesses. The Fed said it would provide $2.3 trillion in loans, mainly to small and midsize businesses, and expand its corporate lending program to some companies with riskier debt that had been excluded before.
As a result of this news, investors are feeling much more optimistic about the prospects for the restaurant industry to ride out the coronavirus recession. The following six restaurant stocks were up big in early trading -- several by double-digits -- though they've given up some of those gains this afternoon:
| Restaurant stock | Price change on 4/9/20 |
|---|---|
| Wendy's Company (WEN 0.50%) | 5.6% |
| Dave & Buster's Entertainment, Inc. (PLAY 1.67%) | 8.5% |
| BJ's Restaurants, Inc. (BJRI 1.07%) | 6.2% |
| Texas Roadhouse, Inc. (TXRH 2.20%) | 2.8% |
| Darden Restaurants, Inc. (DRI 0.20%) | (1%) |
| Yum! Brands, Inc. (YUM -0.13%) | 6.5% |
As of 2:54 p.m. EDT. Data source: YCharts.
So what
Today's Fed news doesn't necessarily extend a direct lifeline to these restaurants, but it's a signal that the central bank is prepared to continue taking extraordinary steps to keep capital flowing into the market. In other words, today's move higher by restaurant stocks is a product of sentiment, not necessarily a material change in the situation.
Image source: Getty Images.
You should be able to tell by Darden's share price reversal -- the stock was up over 5% at one point but is now down almost 1.3% -- that sentiment continues to play a huge role in what stocks do from one day to the next. That's certainly the case for restaurants.
Restaurants that count on dine-in (or in Dave & Buster's case, play-in) business in particular are subject to big speculative moves. We saw that only two days ago, when casual dining restaurants outpaced the market in a move up, on news that daily COVID-19 cases in the U.S. were beginning to slow.
Now what
While sentiment continues to drive the bus, the business environment is unchanged. The outlook for the coming weeks -- and likely months in many cases -- is not good. Dine-in service is likely to remain closed in many markets, even as COVID-19 cases decline. The risk of reigniting the spread of this deadly disease is just too great to simply go back to "business as usual" before there are effective treatments or a vaccine in place.
That's not to say restaurant stocks are a bad investment. To the contrary, takeout and drive-through chains are still doing some business, and they will likely see the quickest recovery as parts of the economy start to come back online. Moreover, we will eventually beat COVID-19, and chains like Darden, BJ's, Texas Roadhouse and Dave & Buster's will reopen their doors. When that happens, investors who buy at recent prices and sit on their hands for the recovery will likely do very well.
The question you must ask yourself now, however, is are you willing and able to ride out what could be a very volatile period? If not, your best bet may be waiting for more signs that the economy is opening back up for business before investing.
