The true health of the restaurant industry is a constant debate. While there is data, it’s hard to know exactly what makes up that data. Anyone looking just at legacy casual dining is going to think the industry is falling to pieces. Anyone just looking at asset-light QSR stocks may be wearing rose-colored glasses.
So to get a true sense of how the industry is doing, we’re launching the Restaurant Finance Monitor Stock INDXX under the ticker symbol RFMSI.
The tool will help answer many questions about the industry and bridge gaps of understanding between "main street, Wall Street and the restaurateur," said Dan Weiskopf, the analyst and researcher behind the index and a wealth advisor and ETF strategist at Access ETF Solutions.
He said there are a few things that make the index different from other measures of the industry and other indexes or ETFs in the industry. One key is how the index will be weighted.
"Most indexes are defined with traditional recipes. They are market cap weighted or perhaps even equally weighted. The problem with those two strategies in the restaurant industry is that they are not research driven," said Weiskopf. "A market cap weighting in the restaurant industry skews way too much to the large brands like McDonald’s and as such the top six to 10 companies drive the performance. The problem is that six companies don’t make a trend and certainly shouldn't define an industry."
Instead, the RFMSI recipe weights each public company to look more like the actual industry. The QSR and fast-casual category makes up 70% of the index, full service makes up the balance. There’s also a minimum market cap that narrows the scope down to about 40 public companies. Then research determines who is really performing with its public peers.
"The index is rebalanced quarterly at which time it sidelines about six companies that are showing relative underperformance versus the index," said Weiskopf. "Specifically, the top five companies are about 5% each, thereafter the next 20 are within a range of 4%-3% and the last of the group are between 3%-2%. In total the index holds today 29 names, but historically has held a range of 29-34 names."
So who should care about the index? Just about any restaurant finance watcher out there.
"Private equity, activist investors and institutional investors should pay attention to the index because it offers a legitimate, transparent 10-year benchmark to measure the industry," said Weiskopf. "Similarly, restaurant owners will find value in monitoring it because the methodology is transparent and should help highlight from a competitive front what public companies have momentum and those who are falling on harder times."
Monitoring the index, he said, allows any industry watcher to see the macroeconomic story in full, transparent view. Everything from demographic and consumer trends as well as commodity costs and regulation will reflect how the index performs, and thus how the industry is really doing.
Weiskopf said the index has some clear insights for 2017 and some trend lines for the new year. While it underperformed the S&P500, things are looking pretty good.
"We do not believe that the index performance is an indication of a restaurant recession or an overall economic recession. The index was up about 7.03% in 2017, underperforming the 21.5% returns for both the Small Cap Growth index and the S&P500 index. Arguably this disappointing performance was more about the disruption occurring in the industry than about any lack of expansion," said Weiskopf.
Since the index was first formed in December of 2006, it has shown a return of 12.77% compared with the S&P500 index return of 8.21% and the Russell 200 Growth index of 8.99%.
Follow along with the index here, and stay tuned for news on rebalancing and other index updates.