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Why Casual Restaurant Stocks Were Crushed on Thursday

By Jon Quast – Updated Jun 11, 2020 at 5:13PM

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Investors are rethinking their positivity after a prominent figure suggested it will be a long economic recovery.

What happened

If you look through the list of down stocks on Thursday, you'll find several well known casual-dining restaurant companies. As of 2:30 p.m. EDT, all five of the following stocks were down big:

  • Darden Restaurants (DRI -2.32%) is down 6%
  • BJ's Restaurants (BJRI -0.25%) is down 13%
  • Dine Brands (DIN -1.27%) is down 13%
  • Brinker International (EAT -2.54%) is down 11%
  • Dave & Buster's (PLAY -1.40%) is down 13%

These big drops, however, should be examined in context. All five of these companies have more than doubled since the market bottomed on March 18, handily outpacing the broad market rebound.

DRI Chart

DRI data by YCharts

So what

None of these casual-dining restaurant companies reported news or released an SEC filing. Therefore, to explain today's drop, perhaps we should start by asking why these stocks have recovered so much over the past three months. The recovery shouldn't be attributed to the underlying business fundamentals. While some of their fast-food cousins have sustained their businesses through take-out and delivery, it's not so easy for casual-dining chains. Just look at some of the recent comparable-sales data:

  • In the fourth quarter through May 17, Darden's comparable sales were down 48% 
  • BJ's comparable sales were down 68% during the week ending May 5, its best week of its second quarter to that point 
  • Dine Brands' comparable sales were down 73% in April 

In other words, casual-dining restaurant sales were abysmal while the stocks were rallying. That's because the market doesn't trade on where things are right now, but rather on where investors believe things are headed. There may be good reason for their belief, but sometimes new information will reset expectations. 

For a couple months, investors have bet on a quick recovery in the restaurant industry. And that's not a baseless gamble. Consider a June 9 business update from Brinker International, which has already reopened dining rooms at 82% of locations. At those locations, comparable sales for the week ending June 3 are only down 11% from the same week in 2019. It's a small sample size, but it's a rapid recovery.

Furthermore, even the chains least likely to reopen quickly are reopening. Consider Dave & Buster's. It's half-restaurant but also half-arcade. That's a lot of frequently touched surfaces to sanitize to ensure costumer safety from the coronavirus. But even this stock popped recently after investors realized it's already reopening locations where possible.

So these casual-dining stocks have risen with increasingly optimistic sentiment. And sentiment is why these same stocks are falling today.

A man places his hand on his head with a shocked expression as he looks at his computer.

Image source: Getty Images.

Now what

Expectations reset with new information. Yesterday, U.S. Federal Reserve Chairman Jerome Powell threw cold water on Wall Street's fire by mentioning a drawn-out economic recovery. The market's recovery since March suggested a quick, happy ending. Powell's use of phrases like "long road" and "some time" suggest otherwise. Furthermore, interest rates will remain near zero. A complete return to normal doesn't need that help. 

There's also the lingering fear that COVID-19 could reaccelerate in the U.S., forcing a fresh wave of dining-room closures. Consider that South Korea's CDC is reporting that coronavirus cases are starting to climb again. The country was seen as a bright spot in the fight against COVID-19. But if the coronavirus starts to infect people again there, it's logical to assume it will break out again in the U.S. as physical distancing guidelines are relaxed.

So what's an investor to do with casual-dining restaurant stocks? I would encourage you to not invest in these stocks, or invest in any stock, simply because they're down. Doing so results in purely speculative trades that are based on hoping the stocks will just "go back up." The problem with this strategy is any piece of news, like Powell's speech, will leave you holding the bag. Are you prepared to hold on for the "long road" to recovery?

As a starting place, review what the companies' investing theses were prior to the pandemic. That process can help you separate good companies with bright futures from the rest. From there, it's easier to assess each company's ability to survive the current crisis, recover, and return to being a rewarding shareholder opportunity. It could take years to play out, but that long-term horizon will help mitigate the emotions springing from daily moves like today.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends Dave & Buster's Entertainment. The Motley Fool has a disclosure policy.

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Stocks Mentioned

BJ's Restaurants, Inc. Stock Quote
BJ's Restaurants, Inc.
$23.85 (-0.25%) $0.06
Darden Restaurants, Inc. Stock Quote
Darden Restaurants, Inc.
$126.32 (-2.32%) $-3.00
Brinker International, Inc. Stock Quote
Brinker International, Inc.
$24.98 (-2.54%) $0.65
DineEquity, Inc. Stock Quote
DineEquity, Inc.
$63.56 (-1.27%) $0.82
Dave & Buster's Entertainment, Inc. Stock Quote
Dave & Buster's Entertainment, Inc.
$31.03 (-1.40%) $0.44

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

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