This article was originally published including charts courtesy of CTS Trend on The Street.com’s Street Insight Long/Short Trader on Dec. 26, 2006.
So what's on your menu this week? Some left over latkes from Hanukkah? Perhaps some smoked ham cold cuts from Christmas? Looking into 2007, there are several themes in the restaurant sector that will continue to create investment and trade opportunities. So, without further ado, here is my restaurant year in review and outlook for the year ahead.
There were several high-profile restaurant IPOs that took place in 2006. First came Chipotle Mexican Grill (CMG), which soared from the get-go and remained a Wall Street favorite for the balance of the year. The stock even caught on Friday.
It was a real up and down year for the casual dining segment. A strong start to the year was thwarted in the spring by a market correction, spiking energy prices and the fear of inflation. These companies were hit hard as traffic migrated down the food chain to the quick-service restaurants as the substitution effect took hold. Not until energy prices peaked, the market correction ended and the Fed finally pushed pause in the middle of the summer did the casual dining chains begin to rebound. OSI Restaurant Partners (OSI), which operates the Outback Steakhouse chain among others, managed to get a recent private equity buyout offer. All of the popular casual dining chains had similar chart patterns during the year. Here are some of the favorites: Applebee's (APPB), Darden Restaurants (DRI), Brinker International (EAT) and Ruby Tuesday (RI) all charted together.
Substitution Effect Bolsters Quick-Service Names
The quick-service restaurants were the beneficiary of the substitution effect. The stock that not only weathered the spring squall but managed to be one of the best performers of the year was McDonald's (MCD). Not far behind was Yum! Brands (YUM). I continue to like both of these stocks, especially as they both continue to expand overseas, specifically in
The steakhouses were problematic this year. The reason for this was the same woes that hurt the casual dining stocks in the spring and early summer (as I mentioned above). Adding insult to injury, these stocks could not rebound because they were hit with the double whammy of higher beef prices. I traded out of and then back into Ruth's Chris Steak House (RUTH) during the year, managing to sell just at the top and then reentering back in the fall at dramatically lower levels. I am still holding my new positions today. Here is a combined chart of RUTH and its closest high-end steakhouse rival Morton's Restaurant Group (MRT).
Who Wants Pizza?
The one group I played wrong this year was the quick-service pizza sector. I was long Domino's Pizza (DPZ) coming into the year and sold too early. On the other hand, I do have pizza exposure through my YUM holding, so I did not totally blow it.
At the time of this Blog entry and the Street.com article,