One of the great tropes of the financial writer's art is to write about restaurants as a proxy for how the country is doing. Thus, over the last few years we have had countless stories like this one, about how fine dining is suffering, or this one, from our own Dividend Kings, about how profitable McDonald's is. But does this really hold for investment?
To see, I compared the stocks of three publicly traded restaurant chains that are fairly representative of the spaces they're in. These were Ruth's Chris (RUTH), a fine dining chain specializing in large hunks of prime meat; Cracker Barrel (CBRL), a roadside chain that my family often stops by when driving cross-country, and YUM Brands (YUM), owner of KFC, Taco Bell, Pizza Hut, and other fast-food chains. (I decided not to use McDonald's (MCD) to avoid making this a test of management.)
What I found holds to the premise in the longer run. Since late 2007, when the economy first started to teeter, Yum returns have indeed been yummy. The stock is up over 50% in that time. Cracker Barrel has done less well, up 28%, while Ruth's is down 64%.
Take the analysis back just a year, the early part of the recovery, and you get a different picture. Now it's Cracker Barrel that's the leader, up 9%, with YUM up 4% and Ruth's down just 6%. But if you go back just three months, to the start of September, Ruth's is doing almost as well as the fast-food guys -- it's actually up 5%, although Cracker Barrel is still leading, up 21%.
So it is possible to trace the recession, and the early stages of the recovery, through restaurant stocks. People aren't necessarily trading down to McDonald's from Morton's steak house, but they do go for price in a downturn, and the early stages of a recovery do seem to correspond to more road trips.
If this is a normal recovery, look for fine dining to shine in 2012. This could be great news, because many of the stocks, like Ruth's, have been beaten down into the single digits. If you think Europe will bury the economy next year, stick with Mickey D and his pals. And if you don't like the chains I used in this comparison, find some you like and let me know how it goes.