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Market Daily

Restaurants That are Worth the Risk to Invest

While some shares of restaurants like Domino’s Pizza (ticker: DPZ) have done well during the pandemic, many others have not done so well. This can be an opportunity for investors. Here’s a look at seven budget restaurant stocks that have been defeated but seem to be able to weather the rest of the pandemic and end up rewarding investors willing to take the risk. In this list, you will find that multi-brand restaurant companies have performed better than those with only one name. That said, those stocks are all in negative territory for the year, and an economic recovery that includes a vaccine could potentially substantially boost all of these names.

Dave & Buster Entertainment (PLAY)

Right now, Dave & Buster “looks like a pretty cheap stock,” says Andy Barish, an analyst at Jefferies. He expects some recovery next year, but not to 2019 levels. After shutting down all of its sites temporarily due to the pandemic, the company had reopened 89 locations on September 9 – but all were operating under reduced hours and capacity limits as dictated by each site, new seating, and gaming configurations for promoting social networks. Distancing, a temporarily condensed food and drink menu, and extended cleaning and hygiene procedures. Dave & Buster’s is one of those companies that should be reborn once a vaccine is developed, and the economy is more substantial in 2021, said TG Watkins, director of equities at Simpler Trading. The stock fell more than 54% from the start of the year until mid-September.

Ruth’s Hospitality Group (RUTH)

Upscale steakhouses like Ruth’s Chris often don’t top people’s lists for to-go orders, and during tough economic times, many people may choose not to indulge inexpensive meals. In the month to date through July 28, comparable store sales at own restaurants declined 47% year-on-year. Shares of the company have fallen almost 43% since the start of the year through September 16. As the market leader in the premium food category, Ruth is a better-capitalized chain than many private companies. As some of them are closing, Ruth’s is expected to increase its market share over time, says Barish. “As we work through 2021, the number of competitive concepts out there,” he adds.

Denny’s Corp. (DENN)

Watkins uses Denny’s as an example of an investment case in which stock would not have to skyrocket beyond pre-pandemic levels to have the potential to make money for investors. The stock was trading at around $ 21 before the pandemic. At the closing price on September 16 of approximately $ 11, even just getting back to those levels would represent a gain of almost 100%. The recovery of the business is heavily dependent on the regulation of local restaurant dining rooms, which in turn is linked to the number of virus cases. In his latest report, for the quarter ended June 24, Denny’s said national sales at the system level and in the same store dropped dramatically from the same period last year. Although sales in the same store were negative, the pace of the decline slowed for most weeks of the quarter. But preliminary results showed that during fiscal July, the weekly decline picked up as several states resumed their dining room closures.

Restaurants in Darden (DRI)

Charles Lieberman, chief investment officer of Advisors Capital Management, believes the owner of the Olive Garden and LongHorn Steakhouse brands will survive the pandemic and end with less competition. While there is a risk of a spike again this fall, think that in six months, there will be at least one vaccine out. “Once we have a vaccine, all of these restaurants will have a higher price,” he says. Even though casual dining has been hit hard, Darden has done an excellent job with his business’s takeaway side, says R.J., analyst at Morningstar. Hottovy. And the company’s restaurants are affordable even with the economic downturn, he adds. Shares of Darden were down nearly 14% year-to-date through September 16.

Bloomin’ Brands (BLMN)

Like Darden, Bloomin ‘has several brands. Owning the Bonefish Grill, Outback Steakhouse, and Carrabba’s Italian Grill brands means this restaurant has more in stock than one-brand restaurant businesses in case a brand struggles, Watkins says. However, the company’s shares fell more than 25% from the start of the year through September 16. During the second quarter, the company’s sales fell by more than 43%. But BLMN has managed to keep all of its locations substantially open thanks to rapid growth in off-premises sales. “The investments made over the past several years to enhance the customer experience and rapidly pursue the emerging delivery opportunity have been critical to our success in tackling this pandemic,” CEO David Deno in a press release in July. “With the outbreak of this pandemic in March, we were able to quickly switch to a business model that was only outside the buildings, as dining rooms were forced to close.”

Restaurant Brands International (QSR)

Shares of Restaurant Brands International, owner of the Burger King, Tim Hortons, and Popeyes Louisiana Kitchen brands, are down more than 11% since the start of the year through September 16. The company sought to transform the struggling Tim Hortons brand even before the pandemic. But the Popeyes brand is a breakthrough in the restaurant business and has potential for international growth, says Hottovy. He says the company has recruited more aggressive franchisees for Burger King, who will open more restaurants or refurbish existing ones. In the second quarter, while comparable-store sales at Tim Hortons and Burger King declined 29.3% and 13.4%, respectively, comparable store sales for Popeye’s were up nearly 25%.

Yum Brands (YUM)

Yum Brands, which owns domestic brands Kentucky Fried Chicken, Pizza Hut, and Taco Bell household brands – is the best-performing title in this group. But it’s still down nearly 6% from the start of the year through September 16, potentially offering an excellent deal to patient investors. NPC International, Pizza Hut’s largest franchisee, went bankrupt earlier this summer. But this business was in trouble even before the pandemic, says Hottovy, and he thinks Yum!, on the other hand, can come out stronger on the other side by putting Pizza Huts in the hands of more vital franchisees or removing less performing locations. Meanwhile, Taco Bell is growing and has potential for global growth, while KFC has done well by positioning itself as a value-for-money family restaurant, he says.

Opinions expressed by Market Daily contributors are their own.