Is It Time To Start Selling Restaurant Stocks?

The markets have experienced a healthy rally over the last several weeks. In fact, the Dow Jones index is up 22% since March 5. The S&P 500 is up over 26% in the same period.

A gain of 26% in a seven-week period is quite impressive. Individual investors have been regretting not buying Citigroup (C: 4.18 +5.56%) stock when it was trading at $1 per share, or Bank of America’s (BAC: 17.12 +0.06%) stock at $3 per share. Bank of America’s stock is up 186% since early March, while Citigroup’s is up 209%.

While the depressed financial sector has received the majority of the headlines, financial stocks are still trading well below their 52-week highs. Meanwhile, several restaurant stocks have also posted white hot returns over the last few weeks and are now trading close to their 52-week highs.

Brinker International (EAT: 20.00 +2.83%)

The owner of Chili’s and On the Border restaurants has seen their stock price rise 89% since early March. While operating margins have proven better than expected, the company has still posted 19 consecutive quarter of declining store traffic.   

Darden Restaurants (DRI: 42.28 +0.07%)

While Red Lobster and Olive Garden restaurants remain popular, they are also experiencing a decline in customer traffic. However, the market is taking an optimistic view point and has sent Darden’s shares up 67% and this week the stock hit a new 52-week high of $41.21.

P. F. Changs (PFCB: 44.01 +1.50%)

The hip Chinese bistro has been able to post better than expected earnings performances recently, but traffic declines have continued since early in 2008. Despite being viewed as an expensive alternative in an environment where consumers are looking for value, PFCB’s stock has nearly doubled since early March. In fact, they also hit a new 52-week high this week at $34.11.

Ruby Tuesday’s (RT: 10.54 +4.46%)

The real star of the restaurant sector has been Ruby Tuesday. Their stock is up an incredible 730% since early March. Despite a strong competitive environment and economic headwinds, the company has aggressively promoted its offerings successfully. However, after gaining 730% in the last seven weeks, it’s likely that investors are going to start taking some profits.

It’s important to remember that while the recent market rally has been a nice boost, the reality is that the economy is still in the midst of a major recession and no one knows for sure when it will end. While the restaurant stocks profiled in this article have seen their share prices skyrocket over the last two months, during that time another 1.3 million U.S. workers have lost their jobs. The unemployment rate has jumped from 7.6% to 8.5%. And maybe most importantly, consumers are clearly still reducing their discretionary spending and are not eating out at restaurants nearly as much as they have in the past.

So while the recent market rally has been good to restaurant stocks, it’s hard to see them holding onto those gains for long. The road to economic recovery is going to be steep and treacherous.