Healthy investor appetite for restaurant stocks; yet shorts remain active

U.S. personal consumption expenditure declined for the second consecutive month in May. Spend on long lasting durable goods such as cars fell, but the Financial Times Lex column reported an increase in total retail spend in restaurants over the past twelve months. The share prices of most U.S. restaurant stocks have been rallying and ownership by institutional investors is healthy, yet short sellers have been increasing their positions, which raises questions about the long-term viability of the rally. We use securities lending flow data to identify investor sentiment towards U.S. restaurant stocks over the second quarter including.

Most shorted stocks

The Bloomberg screen shows the three most shorted stocks in the Restaurants sector are BJ’s Restaurants, Inc. (NASDAQ:BJRI), O’Charleys, Inc. (NASDAQ:CHUX) and Pf Changs China Bistro, Inc. (NASDAQ:PFCB) With a sector average of 4% of total shares outstanding on loan, these stocks are far above the average at 16%, 14% and 14% respectively.

BJs Restaurants Inc. has actually seen its short interest decline 20% from last year and still retains the dubious honor of being the most shorted stock in the sector. Despite this, the shares have continued to rally, reaching unprecedented highs, and institutional investors who lend their shares currently hold more than a third of total shares outstanding, which is well above the sector average of 20% of total shares.

High institutional investment but shorts active

Ruby Tuesday, Inc. (NYSE:RT) appears amongst the top ten stocks with the highest institutional investment, as evident from the Bloomberg screen below. Long only funds who lend own 33%. Short interest has fluctuated between 4% and 7% of total shares since March, before settling back at the lower level as the share price has oscillated. Buffalo Wild Wings (NASDAQ:BWLD) and Chipotle Mexican Grill, Inc. (NYSE:CMG) appear high in the list of stocks with high institutional ownership, but a screen of sentiment on this sector placed these stocks as subject to negative sentiment over the past quarter.

The share price of Buffalo Wild Wings has soared over the year and reached new annual highs last week, but appears in the negative sentiment list of a screen of the sector. Short interest has been building over the past quarter doubling to over 8% of total share outstanding following a year of short covering. Institutional ownership is decreasing, but a third of the total shares are still being held by large funds who lend.

Similarly, Chipotle Mexican Grill, Inc. (NYSE:CMG) also appears with Buffalo Wild Wings as a stock subject to negative sentiment over the past quarter, despite it also seeing a share price rally. Chipotle’s share price rally has continued over the year, reaching a new annual high this week. Although there has been recent short covering from the annual high of 12% to 9% of total shares outstanding over the past month, short sellers remain increasingly bearish towards this stock, with short interest on the rise since January when it stood at 4% of total shares outstanding.

Doughnuts

The gradual decline in share price of Krispy Kreme Doughnuts, Inc. (NYSE:KKD) in the five months leading up to April had short sellers more than doubling their short positions in the doughnut chain, which resulted in a new annual short interest high of 5.8% of total shares outstanding. However, the sudden u-turn in share price in May, which continues to rally, sent short sellers rushing to cover their positions. Short interest fell from its high to its current position of 2% of total shares outstanding.

Bottom line

Average short interest amongst the U.S. restaurant stocks is at 4% of total shares outstanding with over half of the stocks seeing an increase in short interest over the past quarter. That said, average institutional ownership in these stocks is relatively high at 20% and share prices continue to rally. While short sellers may anticipate a correction in the share price rally, the long term investors seem happy to hold their positions.