After big selloffs, a second take on restaurant shares

Thu Feb 11, 2016 12:29pm EST
 
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By Rodrigo Campos

NEW YORK (Reuters) - Restaurant stocks have sat like dry toast for the last six months, but investors are now starting to nibble back into the sector.

After aggressively buying restaurant shares early in 2015, investors started dumping them midyear on fears that the industry was spread too thin. The public appetite for eating out was not expanding as fast as the industry itself and an anticipated bump in sales based on gasoline savings was not as big as expected.

Now, after more than a dozen restaurant companies - including El Pollo Loco LOCO.O, Cosi COSI.O, Famous Dave's of America (DAVE.O: Quote) and trend leader Shake Shack (SHAK.N: Quote) - have lost more than half their value, some investors are coming back around.

"We are getting close to an investment opportunity in restaurant stocks," said Bryant Evans, portfolio manager at Cozad Asset Management in Champaign, Illinois. He just bought into Darden Restaurants (DRI.N: Quote), which owns the Olive Garden chain and is down almost 14 percent from last July, and pays a 3.4 percent dividend.

THE FUTURE IS BRIGHT, BUT ...

There are signs of a pick-up in the restaurant industry, with December sales up 7.5 percent from the same period a year earlier, according to Census Bureau data. Sector employment has been expanding as well; in January it was up 3.5 percent from January 2015, according to preliminary Labor Department data.

But investors need to choose wisely. Higher employment spells greater labor costs for an industry on the front lines of the battle for a higher minimum wage. Consumers have been tight with their gasoline savings. And the industry may have gotten ahead of itself.   Continued...

 
An El Pollo Loco restaurant is shown in San Diego, California, in this file photo taken May 13, 2015.  REUTERS/Mike Blake/Files