Two Small-Cap Restaurant Stocks for 2010
By Jonas Elmerraji
July 29, 2010
The investment choices on Wall Street have been harder to come by
lately - the massive rally of 2009 has left few bargains on the table
right now, and with increased volatility adding fuel to the fire in
2010, it's painfully clear that the days of grossly undervalued
companies are over.
But while stocks have overwhelmingly made up for the enormous losses
they suffered in 2007 and 2008, investors have mistakenly overlooked
the companies that were already offering good value in pre-bubble 2007.
After all, while they may have bounced back to their 2007 levels,
they're still far from reasonably priced. That's exactly the kind of
opportunity we're going to be taking advantage of this month, with a
familiar name.
Watch the Presentation: Secret $200 Retirement Blueprint
Last year $200 could have turned into $10.1 million following 5 simple
steps revealed in this secretive retirement blueprint.
It's happened before, but could it happen again and could it happen to
you?
Click here to watch the presentation now. (Turn your speakers on)
Some of the biggest gains to be found come from highly competitive
industries in which the smallest signs of weakness snap investors into
sell mode. Take the restaurant industry, for instance...
The restaurant business can be one of the most profitable businesses
out there - and the most unforgiving. With low barriers to entry, the
restaurant industry is a sort of revolving door for would-be
businessmen and their investors. In total, more than 60% of new
restaurants close their doors permanently within a year, according to a
study by Ohio State professor H.G. Parsa - and despite appearances,
being backed by a big brand doesn't change things that much.
Only around 43% of franchise locations are around three years after
serving their first plate...
Things have only been made worse in the last several years. With
discretionary spending slashed across the board and unfavorable lease
terms still in place in most cases, scores of dining establishments
were forced to close their doors during the recession. And while 2009
brought more consumer cash into restaurant registers, hopes of a
consistent recovery have started to wane in the last quarter.
So with such a bleak outlook, what kind of investment opportunity could
we be looking at in restaurants? As is the case with most things Wall
Street, things are rarely as they seem.
The competitive tenor of the restaurant business has only been
accelerated in the recession, as investment dollars in once-attractive
dining chains shifted into high-growth businesses like mid-cap Chipotle
(NYSE:CMG), inflating its valuation to more than 6 times the industry
average.
Wealth Revelations 20:10
The lame will walk. The blind will see. The old will be young...
Four tiny companies could make those miracles into a reality - and they
could make you richer than you have ever dreamed. Click here to learn all the details.
So, where's a small-cap investor to turn? Here's a glimpse at two
small-cap restaurant stocks worth watching this year...
DineEquity (NYSE:DIN): While DineEquity has quite a bit of debt to deal
with, investors shouldn't underestimate the power of its Applebee's and
IHOP brands. With the largest casual dining and breakfast chains under
its belt and generating substantial cash flows, the company should be
able to slowly chip away at its financial obligations. That said, I
wouldn't recommend getting into shares until DineEquity's fundamentals
improve...
Brinker International (NYSE:EAT): On the other end of the spectrum is
Brinker International, home to the Chili's, On the Border, and
Maggiano's chains of restaurant brands, which trail only Applebee's in
unit size. Unlike DineEquity, Brinker benefits from decent margins and
relatively moderate debt. A switch over to more franchises in its
restaurant base should help the company grow its income in the coming
quarters...
I'm not recommending that you get into either of these stocks right now
(truth be told, I'm a much bigger fan of a third restaurant stock), but
I think that they could emerge as attractive investments later on.
Until then, continue to keep an eye on their fundamental performance.
[Independence Note: Unlike scores of other penny stock resources, we're
100% independent from the companies we talk about in the Sleuth - that
means that we never accept compensation in exchange for profiling a
company, and our editors never own a position in any stocks they talk
about.]
Sincerely,
Jonas Elmerraji
P.S.: What about that third restaurant chain that I am a fan of? A
cursory valuation analysis suggests that it's 75% undervalued right
now. I've already recommended that my Penny Stock Fortunes readers buy
shares. To get the name before it climbs out of "buy" range, click here now...
Two Restaurant Stocks for 2010 is featured at Penny Sleuth.
|
