Sector Snap: Restaurants Slide As Profits In Doubt

He also downgraded P.F. Chang's China Bistro Inc. and Red Robin Gourmet Burgers Inc. to "Market Perform' from "Outperform".

Elliott said in an analyst note the stocks have become overvalued and have been driven by several upside earnings surprises from companies due to cost cuts.

"We believe traders have extrapolated these surprises to the entire sector, and many now seem to expect cost-driven upside earnings-per-share surprises from all casual dining companies," he said. "We do not share this building enthusiasm, as the recent earnings-per-share surprises have come from companies in somewhat unusual circumstances."

Last week, for example, Ruby Tuesday of Maryville, Tenn., reported a better-than-expected profit in its fiscal third quarter. Shares soared even though net income still fell nearly 60 percent. Ruby Tuesday was able to beat expectations by severely slashing its capital expenditures.

In midday trading, Ruby Tuesday shares fell 33 cents, or 4.9 percent, to $6.41 while shares of Cheesecake Factory dipped 50 cents, or 3.7 percent, to $12.98.

Shares of Cracker Barrel slipped $1.04, or 3.2 percent, to $31.52 and Steak 'n Shake shares dropped 59 cents, or 6.7 percent, to $8.28.