What Happened?
A number of stocks jumped in the afternoon session after WTI crude fell below $70 per barrel, easing pressure on consumer wallets.
Wendy's surged 30% (driven largely by retail enthusiasm and a CFO change), while broader quick-service and casual dining stocks like McDonald's and Darden benefited from the macro tailwind.
Oil prices dropped 3%, hitting their lowest levels since early March, acting as a de facto tax cut for middle- and lower-income consumers. The restaurant sector, particularly quick-service, is highly sensitive to gas prices. When it costs less to fill up a car, lower-income consumers have more discretionary income to spend on dining out. This read-through is crucial right now, as restaurants have recently warned of traffic slowdowns due to inflation fatigue. Cheaper energy provides a much-needed catalyst for traffic recovery, though wage inflation remains a risk to restaurant operating margins.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks.
Among others, the following stocks were impacted:
- Traditional Fast Food company El Pollo Loco (NASDAQ: LOCO) jumped 4.9%. Is now the time to buy El Pollo Loco? Access our full analysis report here, it’s free.
- Modern Fast Food company Wingstop (NASDAQ: WING) jumped 4%. Is now the time to buy Wingstop? Access our full analysis report here, it’s free.
Zooming In On El Pollo Loco (LOCO)
El Pollo Loco’s shares are not very volatile and have only had 3 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful, although it might not be something that would fundamentally change its perception of the business.
The previous big move we wrote about was 14 days ago when the stock gained 4.3% on the news that the CPI data showed food away from home rose only 0.3% in May, well within manageable range for operators.
The broader inflation shock was concentrated in energy, not food costs or labor. That was a margin signal the sector needed. The second catalyst was more timing related: the World Cup kicked off later in the week across host cities in the U.S., Mexico, and Canada, running through July 19. Goldman Sachs and Deutsche Bank both flagged restaurant stocks near stadium venues as direct beneficiaries.
When the U.S. last hosted in 1994, restaurants in host cities saw 10% to 15% increases in food and beverage spending. Shake Shack, Cheesecake Factory, and Dave & Buster's cited the tournament as an incremental traffic catalyst, and McDonald's had World Cup-themed promotions active across U.S. and international markets.
El Pollo Loco is up 56.5% since the beginning of the year, and at $16.15 per share, it has set a new 52-week high. Despite the year-to-date gain, investors who bought $1,000 worth of El Pollo Loco’s shares 5 years ago would now be looking at only $895.40.
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