What happened
You probably already noticed that the stock market is going nuts today. That's because there's news of a promising phase 3 trial for a coronavirus vaccine. Certain businesses simply aren't built to endure a prolonged COVID-19 pandemic, and casual-dining restaurants fall in this category. But with a vaccine, investors are betting beaten-down companies like Darden Restaurants, Chuy's Holdings, Denny's, and Ruth's Hospitality Group can finally turn things around.
Shares of these companies are up big today. Here's where they were as of 12:30 p.m. EST:
- Darden stock was up 14%
- Chuy's stock was up 15%
- Denny's stock was up 34%
- Ruth's stock was up 25%
Here's what's got investors so upbeat.
Images source: Getty Images.
So what
With dining rooms closed or open with limited capacity in 2020, restaurant companies have struggled. Some fast-food and fast-casual chains have done well, thanks to drive-thru and delivery options. But casual-dining restaurants just don't do as well with a to-go operating model.
To illustrate, let's look at a metric called comparable sales -- the amount of sales a fixed group of restaurant locations do relative to how they did in the prior-year period. For Darden, Chuy's, Denny's, and Ruth's, comparable sales are all down. Here are the most recent results for each company.
| Company | Comps | Most Recent Reported Time Period |
|---|---|---|
| Darden Restaurants (DRI -0.27%) | (29%) | June 1-Aug. 30 |
| Chuy's Holdings (CHUY -0.74%) | (13.8%) | September |
| Denny's (DENN 0.64%) | (28%) | September |
| Ruth's Hospitality Group (RUTH) | (28%)* | September |
Data sources: official press releases from each company. *Data represents company-owned locations only.
Each comparable-sales figure must be considered in context. For example, both Darden and Denny's are negatively impacted by having a lot of locations in California, a state that hasn't allowed dining rooms to reopen. Then there's Ruth's, whose steakhouses are often found in large, urban areas with strict ongoing guidelines. With this context, it's not surprising to see Chuy's sales improving the most, since a large percentage of its locations are in Texas, where the restrictions are more relaxed.
However, even Chuy's would benefit from a coronavirus vaccine, as would the other three companies. Once life can return to normal, these chains have a hope of seeing business return.
Now what
I have a suspicion many of the people buying these and other restaurant stocks today are looking to make a quick buck. They're likely hoping for a short-term bounce as business results improve from rock bottom. But there's a need to be discriminating in investing, choosing only the best companies for a long-term portfolio.
While perhaps anecdotal, it's illustrative to note that Darden Restaurants stock is now up for 2020 while Denny's, Chuy's, and Ruth's are still down. But winning is nothing new for Darden. From January 2015 to January 2020, Darden far outperformed this group and beat the market average as well. It has a large, diversified restaurant portfolio and a long history of shareholder-friendly actions like its recently reinstated dividend.
In other words, Darden has a track record of beating the market, so I'm not surprised to see it outperforming many of its casual-dining restaurant peers in this turbulent 2020. If the news of a coronavirus vaccine has you looking for beaten-down consumer-discretionary stocks, be sure you're not just looking for ones that are merely down big. Make sure you're also looking for stocks like Darden that have proven their ability to beat the market going forward.
