On the Margin
Restaurant stocks finish year on a sour note

Restaurant stocks finish year on a sour note

Investors have jumped all over small, up-and-coming restaurant chains on Wall Street in recent years, hoping to get in on the ground floor of the Next Big Thing.

But after disappointing sales from some of these growth chains, investors went back to the relative safety of proven concepts in 2015. McDonald’s Corp., Starbucks Corp., and The Wendy’s Company Inc., all ended a good year on a positive note in what was on balance a tough year for the industry.

Former Wall Street darlings like Noodles & Co., Famous Dave’s of America Inc., and Chipotle Mexican Grill Inc., all struggled last year.

On average, in fact, fast-casual concepts that had in recent years dominated top restaurant stocks largely struggled. Fast-casual chains which traded for the full year declined 28.43 percent on average in 2015.

Restaurant % change
Top five restaurant stocks in 2015
Chuy's Holdings Inc. 59.33%
Carroll's Restaurant Group 53.87%
Dave & Buster's Ent. Inc. 52.89%
Starbucks Corporation 47.31%
McDonald's Corp. 26.08%

That underscored how difficult a year it was for restaurant stocks. Investors grew skeptical of the ability of newly public concepts, particularly fast-casual chains, to grow the way they’d projected to grow. And they were largely sour on the restaurant industry in general — industry stocks declined 8.59 percent on average, and not weighted for market capitalization.

Decliners for the year outnumbered gainers two to one. And 14 stocks lost at least a quarter of their value. Only five stocks gained more than 25 percent.

The difficult year was due. Restaurant stocks entered 2015 with many concepts at or near all-time highs and valuations in stratospheric territory. And stocks gained nearly 9 percent in the first half of the year on average, intensifying those concerns.

In the second half of the year, it appeared that investors believed McDonald’s gain would be the industry’s loss. The Oak Brook, Ill.-based burger giant is believed to be taking back share it lost in recent years. A number of analysts have been jumping on board — Nomura analyst Mark Kalinowski upgraded the stock to Buy on Monday, for instance.

McDonald’s stock rose 26 percent in 2015, one of the best performing restaurant stocks on Wall Street, and much of that came in a fourth quarter in which the chain offered all-day breakfast and introduced a new value menu.

McDonald’s gain would make life more difficult for other restaurant chains: A 1-percent change in McDonald’s sales equals $350 million either gained or lost by the industry as a whole.

But investors also believed that Wendy’s would regain share. Its stock rose 17.7 percent in the fourth quarter and 19 percent for the full year. Like McDonald’s, Kalinowski upgraded Wendy’s stock on Monday.

On the other side, it was tough for newer concepts. Noodles & Company had among the worst years of any restaurant stock in 2015, declining by more than 63 percent.

Noodles was hardly alone. The Habit Restaurants Inc. fell by nearly 29 percent. Chipotle Mexican Grill, for years the most dependable restaurant stock, fell nearly 36 percent in the fourth quarter and 30 percent for the year, as falling sales and foodborne illness outbreaks took their toll on the company’s valuation.

The difficulty fast-casual chains had on Wall Street made it more difficult for newly public companies to generate any momentum.

Six companies went public in some form in 2015, four through traditional IPOs, one in a spinoff and a sixth in a reverse merger. Four of those companies are trading below their initial prices: Del Taco Inc., J. Alexander’s Inc., Fogo de Chao Inc., and Bojangles’ Inc.

But even the two companies that are trading above their offering price — Shake Shack Inc. and Wingstop Inc. — have seen better days.

Shake Shack finished the year up nearly 90 percent. But at one point the stock was trading at nearly $97 per share, and has fallen by 60 percent since then. Wingstop stock, meanwhile, fell nearly 19 percent in the fourth quarter but is up 20 percent from its IPO price.

Not all recent IPOs struggled, however. Dave & Buster’s was one of the top performing stocks in 2015, surging by 53 percent for the year and 8 percent in the fourth quarter.

Another casual-dining chain, Chuy’s, had a good year, rising more than 59 percent to be the best performing restaurant stock for the year.

On the opposite side was Famous Dave’s, the barbecue chain that began the year as a Wall Street darling, hitting an all-time high over more than $34 per share in February. But the stock plunged amid sales declines, management turnover and a default on its loan covenants. The stock lost nearly three-quarters of its value in 2015.

Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze

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