Why Food Stocks are Crushing the Market as Economy Slows

Five fast-food stocks have crushed the broader market this year despite a slowing economy, and could be poised for further gains, including Shake Shack Inc. (SHAK), The Wendy's Co. (WEN), Yum! Brands Inc. (YUM), Chipotle Mexican Grill Inc. (CMG) and McDonald's Corp. (MCD). These stocks already have risen by between 25% to nearly 100% since the start of January. Their outperformance was detailed in a story in the Wall Street Journal.

What It Means for Investors

Stocks of fast food chains are often thought of as defensive because they continue to draw cost-conscious customers in times of economic trouble. But these restaurants have broadened their appeal by diversifying their menus to attract health-conscious customers as well. And they've also made it easier and faster for customers to order through new technologies. “The earning growth rates could slow, but [these chains] could do better than full food service,” said Eric Gonzalez, a senior restaurant analyst with KeyBanc Capital Markets.

That's reflected in their stocks. Shake Shack has climbed by 97.8% so far this year; Wendy's by 26.1%; Yum Brands (which operates KFC, Taco Bell and other chains) by 28.4%; Chipotle by 81.9%; and McDonald's by 23.5%. Wendy's and Shake Shack jumped sharply this week on positive earnings reports.

McDonald's has been a leader in offering healthier items to consumers and in using new technologies. It shifted to the use of all white-meat chicken this year, and also upgraded its technology with touch-screen kiosks that allow customers to make their own orders, per the Journal. Chipotle is another leader in leveraging technology. It has used third-party delivery services like DoorDash as well as a mobile app to make ordering as easy as possible. Its digital sales nearly doubled year-over-year for Q2 to 18.2%, up from 10.3% in Q2 2018.

What's Next

Despite fast food chains' giant stock gains, some analysts are predicting a shift in fortunes. Another report in the Wall Street Journal highlights high sales expectations for these chains as the reason for a major valuation gap between fast food restaurants and other casual dining outfits. In order to continue to attract investor dollars, these fast food leaders will need to meet, or exceed, investors' high expectations when they report their next quarterly results.

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