In this article, we discuss 8 restaurant stocks to avoid as Americans begin to cut spending. If you want to see more stocks in this list, check out 3 Restaurant Stocks to Avoid As Americans Begin to Cut Spending.
The restaurant industry has possibly been one of the worst casualties of the recession among the consumer discretionary sector. The continuously rising inflation and low consumer sentiment add to the troubles brewing in the restaurant space. Morgan Stanley’s CIO, Mike Wilson, has been bearish on the sector for a while now, citing compressed margins, soft demand amid inflation, and higher costs. Wilson began warning investors against restaurant stocks in April 2022, and these companies have indeed underperformed benchmark indices.
Similarly, Baird analyst David Tarantino said on July 5 that the slowdown in the firm’s casual dining survey data is a major cause for concern, and the short-term outlook for the discretionary sector is not attractive. A latest USDA report suggested that prices for food at home and food away from home categories are projected to surpass historical averages in the current inflationary backdrop.
The Bureau of Labor Statistics reported that the cost of food away from home climbed 7.4% in the 12 months ending May 2022, while the cost of food at home soared 11.9% over the same time. Some restaurant industry officials have said that this might be a positive catalyst for demand trends in this macro environment. However, McDonald's Corporation (NYSE:MCD) CEO Chris Kempczinski announced in early May that low income consumers now order cheaper menu items or are shrinking their routine order sizes. This reiterates the potential trouble that restaurants could face in the near-term.
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The impact on restaurants varies according to their offerings and customer base. Industry analysts have identified a few restaurants that could land in hot water as Americans begin to cut spending. Some of these names include The Cheesecake Factory Incorporated (NASDAQ:CAKE), Restaurant Brands International Inc. (NYSE:QSR), and Shake Shack Inc. (NYSE:SHAK).
We selected these restaurant stocks based on recent analyst ratings which suggest that slowed consumer spending has had an impact on these firms. We have arranged the list according to the hedge fund sentiment around the stocks, which was gauged from Insider Monkey’s Q1 database of 900+ elite hedge funds.
Restaurant Stocks to Avoid As Americans Begin to Cut Spending
8. Kura Sushi USA, Inc. (NASDAQ:KRUS)
Number of Hedge Fund Holders: 14
Kura Sushi USA, Inc. (NASDAQ:KRUS) runs a chain of technology-enabled Japanese restaurants in the United States. The company's restaurants offer the Kura Experience, which is a revolving sushi service model. On July 11, BMO Capital analyst Andrew Strelzik downgraded Kura Sushi USA, Inc. (NASDAQ:KRUS) to Market Perform from Outperform with an unchanged $80 price target. After Kura Sushi USA, Inc. (NASDAQ:KRUS)’s 35% share price gain on July 8 after its Q3 earnings beat consensus estimates, the stock is approaching his price target, the analyst told investors in a research note. However, the analyst contended that while the latest results show Kura Sushi USA, Inc. (NASDAQ:KRUS)’s robust business momentum, he remains concerned about the consumer spending outlook, also adding that most of the casual dining companies in his coverage are already factoring in a recession.
According to Insider Monkey’s data, 14 hedge funds were bullish on Kura Sushi USA, Inc. (NASDAQ:KRUS) at the end of the first quarter of 2022, with combined stakes worth $45.7 million, compared to 13 funds in the earlier quarter, holding stakes in the company valued at $52 million. George Mccabe’s Portolan Capital Management is the leading stakeholder of the company, with 335,127 shares worth about $18.5 million.
Like The Cheesecake Factory Incorporated (NASDAQ:CAKE), Restaurant Brands International Inc. (NYSE:QSR), and Shake Shack Inc. (NYSE:SHAK), analysts are monitoring Kura Sushi USA, Inc. (NASDAQ:KRUS) amid the challenging macro backdrop.
Here is what Roubaix Capital has to say about Kura Sushi USA, Inc. (NASDAQ:KRUS) in their Q4 2020 investor letter:
“Companies like Kura Sushi (KRUS) should benefit from the consumer rebound, but also have their own unique drivers of value over the next 2+ years. In the case of Kura Sushi, the company is one of the newest restaurant concepts in the U.S. market. With just under 30 stores in 2020, the opportunity for growth is vast to a targeted long-term goal of ~300 locations. The product offering is quality food at an affordable price, something that always resonates with consumers. The experience is unique due to the highly automated food ordering, delivery, and a ‘gamified’ plate return system that all operate on automated conveyor belts. In addition to entertainment value, it enables high throughput with minimal staff. This operating model makes the business more readily scalable nationally as it is less dependent on labor. With rents for many attractive locations in decline due to the pandemic, the concept has a good chance to secure good locations at favorable prices. Even at its modest size, Kura has shown the ability to deliver excellent margins. We expect the end of 2021 and the following year to be a breakout for the company, and the modest valuation versus high growth benchmarks provides a roadmap for solid returns for the stock.”
7. BJ's Restaurants, Inc. (NASDAQ:BJRI)
Number of Hedge Fund Holders: 16
BJ's Restaurants, Inc. (NASDAQ:BJRI) was founded in 1978 and is based in Huntington Beach, California. The company owns and operates casual dining restaurants in the United States, offering pizzas, beverages, appetizers, entrées, pastas, sandwiches, specialty salads, and desserts. Casual dining traffic has declined overall, as shown by negative sales growth despite restaurants charging higher prices amid inflationary pressures.
On June 16, Citi analyst Jon Tower lowered the price target on BJ's Restaurants, Inc. (NASDAQ:BJRI) to $24 from $30 and maintained a Neutral rating on the shares. The analyst slashed price targets for multiple company-owned restaurants in his coverage on the back of rampant inflation, higher interest rates, and the consequent effect on market multiples.
Among the hedge funds tracked by Insider Monkey, 16 funds were bullish on BJ's Restaurants, Inc. (NASDAQ:BJRI) at the end of Q1 2022, up from 7 funds in the prior quarter. Frederick Tucker Golden’s Solas Capital Management is one of the leading position holders in the company, with 235,000 shares valued at $6.65 million.
6. Dutch Bros Inc. (NYSE:BROS)
Number of Hedge Fund Holders: 16
Dutch Bros Inc. (NYSE:BROS) is an Oregon-based company that franchises drive-thru shops. The company sells hot and cold espresso beverages, cold brew coffee products, Blue Rebel energy drinks, tea, lemonade, smoothies, and other beverages. On July 11, Baird analyst David Tarantino downgraded Dutch Bros Inc. (NYSE:BROS) to Neutral from Outperform. The analyst is greatly concerned about the likelihood of discretionary spending deteriorating in the second half of this year and into 2023 and is taking a more conservative approach in terms of comps and EPS estimates for the majority of the names in his restaurants coverage. At this point, he continues to like shares of companies with robust and defensive business models, with solid track records of reporting good relative performance in tough economic conditions, said the analyst, who categorized his downgrade of Dutch Bros Inc. (NYSE:BROS) as "tactical" in light of soaring macro risks.
According to Insider Monkey’s data, 16 hedge funds were bullish on Dutch Bros Inc. (NYSE:BROS) at the end of the first quarter of 2022, up from 14 funds in the last quarter. Richard Driehaus’ Driehaus Capital is a significant stakeholder of the company, with 256,096 shares valued at more than $14 million.
In addition to The Cheesecake Factory Incorporated (NASDAQ:CAKE), Restaurant Brands International Inc. (NYSE:QSR), and Shake Shack Inc. (NYSE:SHAK), Dutch Bros Inc. (NYSE:BROS) is one of the restaurant stocks to avoid as Americans begin to cut spending.
5. The Cheesecake Factory Incorporated (NASDAQ:CAKE)
Number of Hedge Fund Holders: 17
The Cheesecake Factory Incorporated (NASDAQ:CAKE) was founded in 1972 and is headquartered in Calabasas, California. The company owns and operates restaurants throughout the United States and Canada. Piper Sandler analyst Nicole Miller Regan on July 11 lowered the firm's price target on the stock to $30 from $38 and kept a Neutral rating on the shares. Similarly, on July 8, Wedbush analyst Nick Setyan said that restaurant valuations are "near a trough," as he believes early signs of inflation have peaked. He lowered the price targets of many restaurants in his coverage sector, slashing the target price for The Cheesecake Factory Incorporated (NASDAQ:CAKE) stock to $38 from $49.
In the first quarter of 2022, 17 hedge funds were bullish on The Cheesecake Factory Incorporated (NASDAQ:CAKE), with combined stakes worth $51.5 million, compared to 18 funds in the earlier quarter, holding stakes in the company valued at $62.4 million. D E Shaw featured as the leading stakeholder of the company, with 315,310 shares worth $12.5 million.
Here is what Baron Small Cap Fund has to say about The Cheesecake Factory Incorporated (NASDAQ:CAKE) in its Q1 2021 investor letter:
“Shares of The Cheesecake Factory, Inc., the operator of casual dining restaurants, were up significantly in the first quarter, as their dining rooms reopened, and business recovered from the depths caused by COVID restrictions. We believe that the company weathered the downturn very well and emerged a stronger, more profitable entity, with an improved outlook. Off Premise sales were robust during the shutdown, and we believe that a good portion of those sales will be retained, so that each restaurant will do more revenue than before. We expect about 15% of restaurants in the casual dining space will be shuttered forever, which will help Cheesecake’s volumes and already strong competitive position. And we are excited about the opportunity for it to grow units, especially in the North Italia and Fox brands, which the company acquired prior to COVID. However, with the stock quadrupling off the bottom and back to its highs of five years ago, and trading at a good multiple of our expectation of near-term earnings, we sold about a third of our position into strength.”
4. Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL)
Number of Hedge Fund Holders: 19
Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) is a Tennessee-based company that runs Cracker Barrel stores consisting of restaurants with gift shops. Its restaurants offer breakfast, lunch, and dinner, as well as dine-in, pick-up, and delivery services. On June 27, BofA analyst Sara Senatore downgraded Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) to Underperform from Neutral with a price target of $94, down from $108. From 2012 to 2019, Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) had consecutively outperformed both family dining and casual dining segment averages, noted the analyst, who still sees the company as a "family dining leader". However, short-term challenges continue to accelerate for its customers and the company’s relative multiple reflects same-store sales growth which will potentially be revised downward.
Among the hedge funds tracked by Insider Monkey, 19 funds were bullish on Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) at the conclusion of the first quarter of 2022, up from 16 funds in the previous quarter. Cliff Asness’ AQR Capital Management is the largest position holder in the company, with 378,238 shares worth $44.6 million.
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Disclosure: None. 8 Restaurant Stocks to Avoid As Americans Begin to Cut Spending is originally published on Insider Monkey.