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Why Many Restaurant Stocks Surged in May

By Anders Bylund – Updated Jun 8, 2020 at 4:17PM

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A rising COVID-19 tide lifted lots of boats, particularly in the restaurant sector, which suffered deep drops in the spring.

What happened

Restaurant stocks had a great month in May 2020, according to data from S&P Global Market Intelligence. Cracker Barrel Old Country Store (CBRL -0.57%) and Texas Roadhouse (TXRH 1.61%) rose 10% last month. Burger King and Popeyes parent Restaurant Brands International (QSR -0.46%) posted a 10.7% gain, while Chili's owner Brinker International (EAT 3.48%) delivered a 13.2% return.

Leaving all of these big gains far behind, though, restaurant equipment vendor Middleby (MIDD 0.09%) rose 22.4%.

A sign on a glass door of a busy restaurant that reads "Come in, we're open"

Image source: Getty Images.

So what

Many companies are looking forward to the end of the COVID-19 lockdown era, but few sectors are as closely tied to that event as restaurant operators. Coronavirus infection rates slowed down in May, and many states started to open up for business again. That's great news for all of the stocks mentioned above, assuming that the health crisis will continue to slow down as the lockdown orders fade away.

The gains were largely inspired by coronavirus news, with a few exceptions.

  • Restaurant Brands delivered surprisingly solid first-quarter revenues in early May, sparking a plethora of analyst upgrades.
  • Brinker raised $125 million of extra cash in a stock offering, causing bullish and bearish price targets to converge around roughly $28 per share.
  • Cracker Barrel reopened 84% of its locations by the end of May, inspiring a positive report from SunTrust.
  • Texas Roadhouse posted soft first-quarter results, but its take-out and delivery operations looked strong. Some analysts argued that this company should come out of the health crisis stronger thanks to the successful expansion of off-premise sales options.
  • Middleby's first-quarter report came in just below Wall Street's expectations, but management drew a promising roadmap for the second half of 2020.

Now what

Volatility, thy name is restaurant stocks these days.

All of the tickers on this sample have at least doubled from their lows in March. Here's a snapshot of their gains since the market bottom of March 18.

QSR Chart

QSR data by YCharts.

They also still have a long way to go before reaching a full recovery. Texas Roadhouse stands closest to regaining its 52-week high, with just 15% left to go. Middleby and Brinker are still trading nearly 40% below their yearly tops.

The spring of 2020 will stand as a huge black mark on each of these companies' stock charts and operating histories, and the June gains are based on the assumption that the sailing toward a full COVID-19 recovery will be smooth. If you disagree with that idea as strongly as I do, you're better off watching this partial recovery from the sidelines than buying into the skyrocketing market momentum shown in the chart above.

Selim Bassoul, former CEO, chairman, and president of Middleby, serves as Chief Innovator at The Motley Fool. Anders Bylund has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Middleby and Texas Roadhouse. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Cracker Barrel Old Country Store, Inc. Stock Quote
Cracker Barrel Old Country Store, Inc.
$97.23 (-0.57%) $0.56
Brinker International, Inc. Stock Quote
Brinker International, Inc.
$25.90 (3.48%) $0.87
Texas Roadhouse, Inc. Stock Quote
Texas Roadhouse, Inc.
$85.91 (1.61%) $1.36
The Middleby Corporation Stock Quote
The Middleby Corporation
$123.99 (0.09%) $0.11
Restaurant Brands International Inc. Stock Quote
Restaurant Brands International Inc.
$54.72 (-0.46%) $0.25

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

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