November 26, 2020

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Foodies welcome

7 Restaurant Stocks That Set Up Well for the Pandemic Surge

Although the most visible industry sufferers of the novel coronavirus have been the travel industry, specifically cruise ships and airliners, restaurant stocks have been trading under a cloud of pessimism. Due to their high-contact nature, along with the possibility of Covid-19 transmission through food and beverage mishandling, it’s no surprise that this specific segment of the hospitality sector has incurred substantial damage.

To be fair, though, some restaurant stocks have fared better than others. Certain business models, such as buffets, have not been feasible due to lockdown measures as well as social distancing protocols. Arguably, you can forget the governmental response and subsequent negative impact. It could very well be that individual consumers just don’t want to deal with risky infrastructures. That’s why some believe the buffet business model is permanently busted.

Another factor that impacts the overall industry is that this sector is filled to the brim with small businesses. Frankly, it’s been heartbreaking to watch local favorites shut their doors for good due to the severe financial pressure imposed on this consumer market. Earlier this year, experts warned that 85% of independent restaurants may go out of business by the end of 2020. It’s looking like this forecast is becomingly alarmingly real.

But is there any hope for restaurant stocks? Depending on the underlying business profile, there actually is. Still, it’s a risky one only meant for hardened contrarians. According to Harvard Health Publishing, “Numerous studies — granted, many of them in animals — have shown that physical or emotional distress increases the intake of food high in fat, sugar, or both. High cortisol levels, in combination with high insulin levels, may be responsible. Other research suggests that ghrelin, a ‘hunger hormone,’ may have a role.”

Obviously, the Covid-19 pandemic’s threat to our collective health and economy has converged to impose acute stress on individuals. And that has caused many to rush to fast-food or even fast-casual eateries. It’s the fear of the unknown that has cynically driven these restaurant stocks.

  • McDonald’s (NYSE:MCD)
  • FAT Brands (NASDAQ:FAT)
  • Restaurant Brands International (NYSE:QSR)
  • Dunkin Brands (NASDAQ:DNKN)
  • Starbucks (NASDAQ:SBUX)
  • Denny’s (NASDAQ:DENN)
  • Rave Restaurant Group (NASDAQ:RAVE)

Now, please take these ideas with a grain of salt. Among the contrarian subjects that I’ve covered, this one is right up there. Personally, I’m not sure how I feel about these companies. However, the food as a stress release concept is backed up by science. Therefore, if you have contrarianism running through your blood, check out these restaurant stocks to buy.

McDonald’s (MCD)

A McDonald's (MCD) burger box and fries rest on a flat surface.

Source: 8th.creator / Shutterstock.com

For years, I had sworn off McDonald’s as a sad relic of a bygone era. But thanks to their store revamp, which includes automated kiosks and surprisingly quick drive-thru services, MCD really isn’t so much a member of restaurant stocks but an investment into our hectic, pre-pandemic lives. However, the strategic direction that management made years ago is now paying off dividends during the coronavirus pandemic.

Throughout this crisis, I’ve made it a point to support small businesses. After all, they don’t have big corporate backers to help them out. These are real families with real problems, none of which they caused. Nevertheless, I’m always startled that as I go to support fellow entrepreneurs, I see row upon row of cars heading into McDonald’s. In my view, that’s poor citizenship, but from a cynical perspective, it’s great news for MCD stock.

And really, there’s no point in fighting this trend. Well before Covid-19, Americans were already addicted to junk food. According to the Centers for Disease Control and Prevention, on any given day before the crisis, nearly 85 million adults will have consumed fast food in the U.S. This addiction is a terribly good catalyst for MCD stock.

FAT Brands (FAT)

a bacon cheeseburger representing restaurant stocks

Source: Foodio / Shutterstock

Probably one of the most counterintuitive restaurant stocks available, you wouldn’t normally think FAT Brands would perform well during a pandemic. If you’ve ever been to the company’s flagship restaurant Fatburger, you know that part of the brand’s appeal is the raucous environment. However, raucous is not a positive term during this pandemic, yet FAT stock has delivered relatively strong gains this year.

What gives? According to the Harvard Health Publishing article I mentioned above, fatty foods may help us cope with various troubles. “Once ingested, fat- and sugar-filled foods seem to have a feedback effect that dampens stress related responses and emotions. These foods really are ‘comfort’ foods in that they seem to counteract stress — and this may contribute to people’s stress-induced craving for those foods.”

When your target investment has the ticker name FAT stock, suddenly, the bullish narrative becomes clear. Is FAT Brands a cynical play, similar to buying equity in tobacco firms? Absolutely! Yet when you’re talking about restaurant stocks during a health crisis, you’ve got to think outside the box. If that’s you, you may want to order more than just a Fatburger.

Restaurant Brands International (QSR)

a tray of food from popeyes

Source: Tony Prato / Shutterstock.com

Inarguably, the biggest crowd that I’ve ever seen at a fast-food joint was at my local Popeyes store. Whether you were looking at the long lines in the drive-thru or in store, the wait to order and the time to receive your food was absolutely ridiculous. But I was told that this was really good soul food, so I had to check it out.

And you know what? Throughout this awful pandemic, nothing has changed – demand is through the roof. That’s further confirmation that the Harvard study was onto something. As well, if you’re interested in gambling on this phenomenon, check out Restaurant Brands International and specifically QSR stock.

Popeyes, along with other brands like Burger King and Tim Hortons (for you Canadians) fall under this corporate umbrella. This makes Restaurant Brands at least worthy of consideration in terms of restaurant stocks to potentially acquire.

Interestingly, most Popeyes customers are high-income earners (defined as an annual salary over $80,000). That’s startling as the behavior of these customers often don’t align with that kind of income level. While QSR stock is more than just Popeyes, the context of this demand profile might warrant a closer look.

Dunkin Brands (DNKN)

Dunkin' Donuts (DNKN) branded store front

Source: JStone / Shutterstock.com

It’s not just food-centric restaurant stocks that may enjoy a contrarian lift from the novel coronavirus. Investors should also consider companies like Dunkin Brands. As you know, DNKN stock is levered to America’s coffee craze. As Psychology Today contributor Berit Brogaard, D.M.Sci., Ph.D stated:

It may not come as a surprise to most people that coffee can have a positive effect on mood. Many of us rely on this benefit before hitting the road in the morning and throughout the day at work.

But coffee may have other mood benefits that simply elevating mood shortly after its intake. Numerous smaller studies have indicated that coffee can help prevent mild to moderate depression—a disorder that affects 15 percent of people in high-income nations.

Frankly, there’s so much to be destressed over. From the loss of loved ones due to Covid-19 to a sharp loss of income from the unprecedented economic disruption, everyone could use a pick-me-up. Dunkin Brands provides exactly that, making DNKN stock a worthwhile bet.

Starbucks (SBUX)

the Starbucks (SBUX) logo on a sign outside of a coffee shop

Source: Grand Warszawski / Shutterstock.com

Another wager on restaurant stocks that doesn’t quite have the contrarian risk factor as other sector players is Starbucks. If you’re like millions of worker bees, Starbucks was part of your pre-pandemic ritual. Better yet for SBUX stock, the post-pandemic environment should usher in a renaissance for the corporate barista. Here’s what Fox News contributor Tucker Carlson had to say:

These people seek absolute sameness, total uniformity. You’re happy with your corner coffee shop. They want to make you drink Starbucks every day from now until forever, no matter how it tastes. That’s the future they promise: everyone doing the same thing.

“These people” in this rant refers to Democrats, which is news to me. Not only do the lefties have the power to fix presidential elections (but not Congressional races, for some odd reason) but they can make you drink Starbucks all day! How is that not a legalized monopoly for SBUX stock?

Seriously, though, the Kuakini Health System noted a blunt fact. With 90% of Americans consuming caffeine in some form daily, it’s this country’s most popular drug. This addiction, not Democrats, is what you want to focus on.

Denny’s (DENN)

outside of a denny's restaurant

Source: JHVEPhoto / Shutterstock.com

As you might imagine, restaurant stocks levered to the indoor dining business model have been questionable ideas because their operations are built toward customers that sit down and enjoy the ambiance. However, I’m going to make an exception to Denny’s. No, I don’t think there’s anything special about their restaurants’ environment. Typically, every time I find myself in a Denny’s, I’m always surrounded by drunk nightclubbing bros.

Moreover, if you think I’m about to praise the company’s food, you’ve got another thing coming. Sure, the comfort food angle as I explained above may benefit DENN stock. But without a drive-thru option, Denny’s lacks competitiveness with other restaurant stocks. While I like their food and all (for what it is), it’s not something I would consider dying for.

But where DENN stock distinguishes itself is in the convenience department. Back when the Covid-19 pandemic disrupted our way of life, many of the conveniences that we were used to – such as grocery stores being open until midnight or later – evaporated. Some of the 24-hour choices are still limited.

Fortunately, multiple Denny’s locations have very convenient hours, even during this crisis. I would know because it’s saved me a few times.

Rave Restaurant Group (RAVE)

Image of a Pie Five Pizza location belonging to Rave Restaurant (RAVE).

Source: Jonathan Weiss /Shutterstock.com

Alright, if you really want to go crazy with your restaurant stocks to buy, you may want to consider Rave Restaurant Group. Quite frankly, you’d have to be on an ecstasy trip at a rave to put money on this insane idea. Therefore, please let me be 100% clear: you do not want to put any money that you can’t afford to lose on RAVE stock.

So why bother mentioning it at all? Good question. You see, I’m a realist. Penny stocks represent Wall Street’s version of “no really means yes.” Everybody loves talking about reliable growth trajectories and dividend yields. But when the microphones are off and the cameras are turned away, the discussion immediately centers on high-risk, high-reward ventures.

At the end of the day, it’s just human nature. Still, I argue that RAVE stock is a step (albeit a small one) above truly speculative wagers.

While Rave’s Pizza Inn is a buffet model transitioning to take outs, and its flagship Pie Five Pizza’s sit-down business faces coronavirus-related risks, both brands feature heavily in states like Texas or Florida. Essentially, they coincide with states where millennials are moving to, which might help Rave over the long term.

But again, it’s super risky. Don’t say I didn’t warn you.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.