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Here's Why Many Restaurant Stocks Surged in April

By Anders Bylund – May 5, 2020 at 9:51PM

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The sector roared back to life last month after a catastrophic performance in March. Is it time to invest in this downtrodden industry yet?

What happened

Shares of many restaurant stocks rose dramatically in April. According to data from S&P Global Market Intelligence, Applebee's and IHOP parent Dine Brands (DIN -3.14%) gained 54.8% and brewhouse chain BJ's Restaurants (BJRI -4.02%) posted a 57.4% return. Outback Steakhouse and Carrabba's Italian Grill parent company Bloomin' Brands (BLMN -4.16%) did even better, scoring a gain of 68.8%.

All of these restaurant chains, and many more, rose in response to good tidings in the COVID-19 battle. Government officials from the local to the federal levels signaled a quick end to the lockdown and quarantine policies of March and April, which would allow casual dining restaurants to expand beyond takeout and delivery options.

A delivery man carrying a large red cooler bag rings a doorbell in an empty apartment building hallway.

Image source: Getty Images.

So what

The gains started in the first week of April as COVID-19 hot spots like Italy, New York City, and Spain all showed a decline in new coronavirus cases. Investors quickly jumped to the conclusion that the pandemic was reaching the end of the line, or at least that shuttered restaurants should be able to reopen their doors to guests.

The restaurant sector continued to surge higher with every tidbit of potentially good news on the COVID-19 front, alongside the broader market with an amplified reaction in each case. Many states made plans to allow restaurant openings in early May, step by step, and limited at first. But anything is better than nothing, so the restaurant stocks kept climbing higher.

Along the way, Bloomin' Brands reminded investors that the company had already been focusing on takeout and delivery options anyhow, so the coronavirus crisis served to accelerate an existing business goal. BJ's and Dine Brands both posted business updates in April, with a full earnings report from the Applebee's camp and a preliminary look at top-line trends for BJ's.

BJ's saw comparable-store sales drop 82% near the end of March, but the decline eased to a milder 70% drop by the week of April 21. Takeout sales increased week by week throughout the cessation of sit-down dining operations. Share prices held steady as the revenue slump largely matched investor expectations.

Dine Brands reported 81% lower comps in Applebee's and an 85% decline for IHOP at worst, followed by another slow but steady climb toward normality. The stock surged 24% the next day, beating the broader market on a generally strong day for restaurants and other consumer-oriented businesses.

A small globe, featuring a map of the world and wrapped in a small mask labeled Coronavirus,  rests in an outstretched pair of hands.

Image source: Getty Images.

Now what

Mind you, all of these restaurant stocks paired their April gains with plunges of even greater scale in March. All told, BJ's Restaurants shares fell 34% over the March-April period, while Bloomin' Brands posted a 33% drop and Dine Brands took a 48% haircut. This has not been a pleasant year for restaurant investors, despite last month's sharp uptick.

The quicker America gets back to business as usual, the happier these companies will be, but there could be a downside to rushing the normalization process. The current wave of store openings might trigger another spike in coronavirus infections, forcing another round of safer-at-home orders and paused dining operations. If so, there's no telling how long the next round of store closings might last.

So the restaurant industry is on an upswing right now, but I would still hesitate to make any investments in that sector. If I see a light at the end of the COVID-19 tunnel, it just might be an oncoming freight train. Be careful out there, folks.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool recommends BJ's Restaurants. The Motley Fool has a disclosure policy.

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Stocks Mentioned

BJ's Restaurants, Inc. Stock Quote
BJ's Restaurants, Inc.
$23.89 (-4.02%) $-1.00
Bloomin' Brands Stock Quote
Bloomin' Brands
$18.42 (-4.16%) $0.80
DineEquity, Inc. Stock Quote
DineEquity, Inc.
$62.92 (-3.14%) $-2.04

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