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Restaurant Stocks Face Tough Going in New Year

After a strong year in 2021, the industry is confronting labor and supply issues in addition to uncertainty over covid, Real Money's Jonathan Heller says.

Restaurant stocks may have feasted in 2021, but negative events are stacking up against food and beverage establishments in early 2022 – and that could mean thin gruel for restaurants over the long haul.

“In review, 2021 was an interesting year for restaurants, and one where you realize how much we take for granted,” said TheStreet’s Jonathan Heller in Real Money recently. “It was no longer as simple as hitting the local drive-thru and quickly getting your order. I can't tell you the number of times that I found places closed or waited more than a half hour for a drive-thru order.”

If disruptions hurt the industry, investors couldn’t tell based on 2021 restaurant stock returns.

“A basket of 40-plus restaurant stocks I follow were up an average of about 33% for the year versus 28.7% for the S&P 500, 14.8% for the Russell 2000 and 19.3% for the Russell Microcap Index,” Heller noted. “All things considered, it wasn’t a bad year given difficult circumstances.”

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A case in point. The "Big Five" -- a self-coined group that includes McDonald's MCD (up 27%), Chipotle Mexican Grill CMG (up 26%), Yum Brands YUM (up 30%), Domino's Pizza DPZ (up 48%) and Darden Restaurants DRI (up 29%) -- were up an average of 32% for the year.

Top performers for the year were all small and microcaps and included Kura Sushi KURA (up 315%), The One Group Hospitality STKS  (up 241%), BBQ Holdings BBQ  (up 225%) and FAT Brands FAT (up 105%).

The worst performer was BurgerFi International BFI (down 59%), which Heller is keeping an eye on as a potential turnaround play. “I just don't have any idea when BFI might become profitable, and the only analyst covering it is projecting losses through 2022,” he said.

In 2022, there are some reasons for optimism, including the potential end of the pandemic and pent-up demand by consumers. “Yet there are ample reasons for pessimism, among them rising supply and labor costs, labor shortages and supply issues,” Heller said. “Those factors should make this one of the most interesting years for the sector in recent memory.”

“Overall, I am more pessimistic, and if anything will concentrate on individual names that become mispriced,” he added.

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