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Restaurants Still Strong, Unbowed After Recession

Stocks in this article: BKW DENN CBRL RT AFCE CMG

NEW YORK ( TheStreet) -- Restaurant names are on a roll, again.

Year to date, an index of 23 restaurant names that I track are up an average of nearly 21% year to date, vs. 16% for the S&P 500 and 15% for the Russell 2000. This has been an exciting sector for much of the past four years.

Historically, restaurants have been a top-performing sector coming out of recessions. During tough economic times, the supply of restaurants typically contracts, as lower demand forces weaker chains to close some doors, or the healthier ones to slow their growth. Once consumers begin to feel more confident, they typically eat out more often and it becomes a supply-and-demand issue.

This time around, however, it has seemed a bit different. While it's true that some names have struggled (non-publicly traded names such as Bennigans, Real Mex, Sbarro, and Friendly's to name a handful), the demand did not appear to slow down all that much during the past recession.

In fact, many restaurant names did well and stockholders were well rewarded in many cases. I expected the bull-run in restaurants to end last year due to the fear of rising commodity costs, but while many names have raised prices, it has not seemed to shake consumers.

Furthermore, there has been action in the sector in terms of new offerings and buyouts. Among recent IPO's are Del Frisco's (DFRG) which operates steakhouses, Mexican restaurant chain Chuy's (CHUY), Bloomin' Brands (BLMN), whose brands include Outback Steakhouse, and Bonefish Grill, and Ignite (IRG), parent of the Joe's Crab Shack brand.

After being bought out in 2010, Burger King (BKW) re-emerged as a public company in June. On the other side of the ledger, PF Changs was taken private in May, California Pizza Kitchen was bought out in May, 2011. A smaller name, O'Charley's was acquired in February.

As a value investor, I've always been partial to names that are either cheap or in turnaround mode. Denny's (DENN) has been quietly turning itself around, paying down debt and getting its financial house in order. While not a top-tier name, the company maintained profitability throughout the last recession, despite the fact that it had a large concentration of locations in some of the hardest hit areas.

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