Restaurant chains all over the world have closed their doors in recent weeks, serving only drive-through or delivery customers. Unfortunately, the pandemic has also increased fears that restaurant workers or delivery drivers could pass on the virus through food or packaging, even though the CDC says there's little evidence. Despite this insistence, many folks who have lived on these greasy treats for years may forgo their indulgence until the storm passes.
Many of these publicly traded companies could go bankrupt in coming months, with business failing to improve substantially long after the pandemic runs its course. The technical charts are already providing important clues about which chains are at the most risk, allowing shareholders and short sellers to consider all of their options. Let's look at three establishments that are flashing the most serious warning signs at this time.
Dave & Buster's Entertainment, Inc. (PLAY) has entered a tough stretch, losing food, liquor, and gaming sales, all at the same time. The company is not equipped to handle drive-through or delivery services, which probably doesn't matter much because food has always taken a back seat to the entertainment experience. As a result, it isn't surprising that the stock dropped to an all-time low at $4.61 last week.
A ferocious short squeeze has nearly tripled the stock price in the past few sessions, but negative news flow hasn't eased, suggesting that committed bears will reload positions soon. And, as it turns out, the best time to sell short often arrives at the end of a brutal squeeze because most of the competition has been forced to cover positions. Also, consider that the uptick stalled as soon as it hit resistance at the October 2014 initial public offering (IPO) level, which marks a common reversal point.
El Pollo Loco Holdings, Inc. (LOCO) is a fast food chain specializing in grilled chicken, with operations on California, Arizona, Texas, Nevada, and Utah. The California location is causing the most problems at the moment, with the state locked down due to the virus. The stock just broke support at $10.00 that was tested successfully at least six times since 2015, raising doubts about its long-term viability.
The company came public at $19.00 in July 2014, entering an immediate uptrend that posted an all-time high at $41.70 just six days later. It broke down from a topping pattern in December, entering a downtrend that found support at $9.58 in November 2015. Lazy range-bound action generated a single sizable rally in the past four years, while steady downside since December 2019 recently posted an all-time low at $6.15.
Red Robin Gourmet Burgers, Inc. (RRGB) had been losing the hamburger wars for years before this year's worldwide crisis. The company's upscale brand has failed to attract customers, with traffic down 3.4% in the fourth quarter of 2019, well before the outbreak. Revenue, net income, and sales have all ticked lower in recent years, dropping the stock off July 2015's all-time high at $95.00. Unfortunately, a poorly timed turnaround plan now looks destined for failure.
The stock broke out above the 2005 high at $62.91 in 2013, entering a modest uptrend that added more than 30 points into the 2015 peak. It broke down from a five-year head and shoulders topping pattern in August 2018, entering a decline that initially found support in the mid-$20s. It broke down once again at the end of February 2020 and has now broken through the 2008 bear market low at $7.29 and posted an all-time low at $4.04.
The Bottom Line
Restaurants that struggled prior to the pandemic now face potentially lethal headwinds, with many chains likely headed for bankruptcy or the pink sheets in coming months.
Disclosure: The author held no positions in the aforementioned securities at the time publication.