How to trade restaurant stocks as higher gas prices hit consumers, according to Piper Sandler

Published Mon, Mar 28 20222:00 PM EDTUpdated Mon, Mar 28 20222:08 PM EDT

Rising fuel prices are hitting consumers' wallets, but that shouldn't deter them from dining in restaurants — which could make for a counterintuitive investing play, according to Piper Sandler. Analysts reached their conclusion after finding that full-service restaurant stocks outperformed the S & P 500 by about 12% at the median during similar historical periods when oil prices surged, according to a Sunday research note. In comparison, take-out establishments underperformed the broad-market index by nearly 18%. "The bigger point is it's saving up for experiences, and this is evidence of that behavior," Nicole Miller Regan, senior research analyst at Piper Sandler, told CNBC. "If times aren't good but you still want to socialize, it's going to happen at a restaurant. It seems consumers are going to protect that time together." The finding comes amid growing investor concerns of the impact that rising energy and food commodity prices will have on restaurant stocks. Spot prices for U.S. West Texas Intermediate (WTI) crude are up roughly 47% since January, the firm noted. Piper Sandler reviewed eight nonrecessionary periods in history that experienced surging oil prices from 1983 to 2022. The time periods lasted 842 days on average, when oil prices surged about 226%, the firm found. During those inflationary periods, dine-in restaurants such as Cracker Barrel , Olive Garden's parent company Darden Restaurants and Texas Roadhouse outperformed fast-food companies such as Chipotle Mexican Grill and Starbucks , according to Piper Sandler's analysis. Some sit-down restaurants such as Olive Garden have other advantages. The Italian-American restaurant is little affected by any grain shortages, as the bulk of pasta wheat, or durum wheat, is sourced domestically, according to a note earlier this month from Piper Sandler. Year to date, shares for Darden Restaurants are down nearly 14%. Meanwhile, take-out establishments, such as Burger King parent company Restaurant Brands International , Shake Shack and Wendy's , are directly affected by rising prices on ground beef, according to an earlier note from Piper Sandler. During periods of falling oil prices, both dine-in and fast-food restaurants generate positive returns and underperform the S & P 500 by 3% each, the note issued on Sunday said. During these periods, McDonald's was a standout performer, beating the broad-market index by roughly 12%. Notably, McDonald's is performing in-line to slightly better than its limited-service peers on a year-to-date basis, the firm said. In its note, Piper Sandler also maintained its overweight rating on McDonald's, but the firm the cut its price target to $250, versus $282 in January. McDonald's stock price is down about 10% year to date.

An Olive Garden restaurant located in Times Square, New York.

Adam Jeffery | CNBC

Rising fuel prices are hitting consumers' wallets, but that shouldn't deter them from dining in restaurants — which could make for a counterintuitive investing play, according to Piper Sandler.