Traders betting against restaurants are getting clobbered

It was forecast to be a tough year for chain restaurants.

Cheaper groceries and more expensive food at restaurants slowed restaurant sales in 2016. Restaurants were also faced with rising pressure to raise their workers’ wages.

But traders who bet against some of the industry’s big names are mostly counting losses.

“The entire restaurant sector has not been kind to short sellers this year with only one stock in the top ten, The Cheesecake Factory, profitable in 2017,” said Ihor Dusaniwsky, the head of research at the financial-analytics firm S3, in a note on Thursday.

This year, investors placed the most bearish bets on Chipotle, the fast-casual restaurant chain that saw an exodus of customers after E-coli outbreaks in 14 states were linked to its food in late-2015.

Betting against Chipotle in 2016 was a winning move: short sellers earned $US355 million, or were up 20%, on their bet.

This year, they have lost 71.4% on a mark-to-market basis, S3 said.

The stock’s 7% drop this week, however, provided some reprieve, as short sellers made back $US157 million of their total $US404 million losses before the slide. Chipotle said on Monday June 19 that it expected to spend more on marketing in the second quarter than the first.

Year-to-date, Chipotle’s shares have gained 11%, a performance that’s not dissimilar to other restaurant chains that Wall Street is betting against. Starbucks, with almost $US1.6 billion in short interest — ranking second — is up 7%, while McDonald’s has soared 27%.

The table below shows the most shorted restaurant stocks, and the losses that short sellers have incurred year-to-date:

And the chart below shows that most of the most shorted restaurant stocks have traded the other way:

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