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Let’s face it, people need to eat, and sometimes, yea, we like to treat ourselves and eat something a little above and beyond the normal fare.

Even in recessionary times, consumers can only hold off for so long before they eventually give in to at least SOME of life’s temptations and finer things.

We can see the evidence that speaks to this need at least partially in the restaurant sector as we speak.

Results have been trickling in over the last few months by many different operators and surprisingly, most of the results have not been as bad as feared, or forecast.

As a result, and also because of the timing of the bounce of the recent market bottom, restaurant stocks have soared to the tune of anywhere from 50-200% depending on the company.

So, is this justified? Are we at or near a bottom, and are things turning around?

Personally, I don’t think so, and I feel that these levels and gains are temporarily unsustainable, and we are in for a rude correction sometime soon.

Specifically, I’m going to discuss 4 names that are on my radar screen.

These include: Chiptole Mexican Grill (NASDAQ: CMG) (NASDAQ: CMG.B), Buffalo Wild Wings (NASDAQ: BWLD), BJ’s Restaurants (NASDAQ: BJRI), and Panera Bread Company (NASDAQ: PNRA).

Restaurant Stocks: A Lot of Hot Air

Out of these companies, 3 of the names were on my radar screen late last year, with a formal recommendation of Chipotle at around $45 per share in my Top 5 Stocks for 2009 article.

With Chipotle at or near where I recommended selling shares, I felt it was prudent to take a look at the company before they reported earnings, as well as some other names in this space that I feel are due for some corrective measures.

Chipotle Mexican Grill:

Stock Stuffed to the Brim Like The Chain’s Burritos

Chipotle LogoChipotle Mexican Grill owns and operates 830 “fast-casual” Mexican restaurants and offers a focused menu of burritos, tacos, burrito bowls (a burrito without the tortilla) and salads made from fresh, high-quality raw ingredients, prepared using classic cooking methods and served in a distinctive atmosphere.

Chipotle adheres to what they call Food With Integrity (FWI), whereby Chipotle seeks better food not only from using fresh ingredients, but ingredients that are sustainably grown and naturally raised with respect for animals, the land, and the farmers who produce the food.

Chipotle’s ultimate goal is to be able to serve only organically raised and grown food in all their restaurants.

Read more about Chipotle.

Why I liked the stock:

  • Stock price was at historically low levels in relative and absolute terms
  • Same-store sales growth still positive
  • Opening restaurants at a break-neck pace, even in recession
  • No debt, strong cash flows, and strong working capital for funding new openings
  • New locations become break even in about 3 years or less
  • Best in breed company, restaurant and management team
  • Continued operational excellence in trying times

Chipotle had some very compelling reasons to purchase shares, at least a small position, way back when I first wrote about the company in my Top 5 Stocks for 2009 article.

Many of those reasons still hold true to this day, including operational excellence, management, etc.

Why I am recommending selling the stock:

  • Stock has doubled in a few month’s time from around $40 to $80 per share, while nothing has fundamentally changed within the company, in fact margins have declined and are expected to do so again when CMG reports Wednesday.
  • Valuation is higher than any other restaurant company within this space (Trailing P/E: 33, Forward (2009) P/E: 30.6 vs. 15.9 for restaurant industry , P/S 1.91 vs. .4 for restaurant industry, etc.)
  • Same-store sales increase was due mainly to increases in prices
  • Stock price is significantly higher (45%) than average price target of $55 per share (way higher than any other restaurant I am covering in this article), meaning expectations are going to be extremely high, and even if analyst’s raise their price targets they are unlikely to raise their stock rating, don’t look for any upgrades even on an earnings beat.
  • Don’t be greedy.

Bottom Line: Although restaurants are usually a leading indicator in economic recovery, I think that analyst’s and Wall Street is ahead of the game here.

Some of this may be due to short covering and unwinding of long held short positions by institutions in shares of Chipotle, but 25% of the float is still short, so this can’t be all of it.

I would recommend selling at least half to 3/4 of your position before earnings are released, and consider a short position, although I will warn you, CMG’s chart is not favorable right now for a short trade, so I won’t formally recommend that.

Buffalo Wild Wings:

Purveyor of wings has flown too high

Buffalo Wild Wings logoBuffalo Wild Wings, Inc., engages in the ownership, operation, and franchising of restaurants in the United States that cater to mainly a sports bar audience serving mainly chicken wings with 14 signature sauces, while providing an atmosphere geared towards watching sports on large screen televisions while enjoying the company of others. The company provides quick casual and casual dining service, as well as serves bottled beers, wines, and liquor.

As of December 28, 2008, the company owned or franchised 560 Buffalo Wild Wings restaurants in 38 states, of which 197 were company-owned and 363 were franchised.

Read more about Buffalo Wild Wings.

Why I liked the stock:

  • Stock price was at historically low levels in relative and absolute terms
  • Same-store sales growth hugely positive even without the influence of higher menu prices
  • Still opening new locations
  • No debt, strong cash flows, and strong working capital for funding new openings
  • Fantastic management team, strong execution, always staying on the cutting edge
  • Continued operational excellence in trying times, in fact thriving because of it

BWLD has performed amazingly in this economic environment because of the perceived value proposition that the company provides.

You get a reasonably priced meal, a festive atmosphere where you can watch the Super Bowl, March Madness and other sporting events, and a good return on your investment of both time and money.

Why I am recommending selling the stock:

  • Stock has more than doubled in a few month’s time from around $15-18 to $40 per share
  • Valuation is higher than many other restaurant companies within this space (Trailing P/E: 28, Forward (2009) P/E: 22.52 vs. 15.9 for restaurant industry , P/S 1.57 vs. .4 for restaurant industry, etc.)
  • Cash reserves have been dwindling
  • Simple concept that has no real moat, consumers might trade up as soon as things improve, or the perception of improvement spurs more refined tastes
  • Chicken wing prices are on the rise
  • Has been written about in Investor’s Business Daily, means the good times are near finished
  • Stock price is slightly higher than average price target of $35 per share, meaning expectations are going to be extremely high, and even if analysts raise their price targets they are unlikely to raise their stock rating, don’t look for many upgrades even on an earnings beat.
  • Don’t be greedy.

I will admit that BWLD has rightfully deserved its rapid ascent up the charts.

Management has continued to excel, and the downtrodden economy has seemed to actually help the company’s results.

But buyer beware…expectations are now higher.

Bottom Line: Whenever a stock gets a full write up in Investor’s Business Daily, Barron’s or other such publications, it means the good times are about through.

Liken this to the dreaded Sports Illustrated cover jinx.

It means that institutional investors have had their fill, the stock is now showing up on mainstream radars, and the story has run its course.

That’s not the only reason I am weary.

Just looking at the valuation, as well as the stellar results, leads me to be fearful of any misstep by management, or any slight dip in results.

Get ready for a huge tumble if estimates are revised lower at all, because expectations are now so high because admittedly, BWLD has executed flawlessly, and thus far exceeded pessimistic expectations by a wide margin.

Will the good times continue? I wouldn’t stick around to find out, especially if you’re sitting on a quick double.

BJ’s Restaurants:

Deep Dish Pizza and Pizookies are Good, but This Good?

BJs LogoBJ’s Restaurants, Inc. owns and operates casual dining restaurants in the United States.

It operates restaurants under the BJ’s Restaurant & Brewery brand name, which includes a brewery within the restaurant; BJ’s Restaurant & Brewhouse, which receives the beer it sells from its breweries or an approved third party craft brewer of proprietary recipe beers; and BJ’s Pizza & Grill, which is a smaller format, full service restaurant.

BJ’s offers an innovative and broad menu featuring award-winning, signature deep-dish pizza complemented with generously portioned salads, appetizers, sandwiches, soups, pastas, entrees and desserts including their famous Pizookie dessert.

In addition, at most locations, BJ’s features award-winning handcrafted beer to go along with highly detailed, contemporary decor and usually includes a bank of TV’s, including several high definition flat panel televisions for patrons to enjoy while they eat.

BJ’s Restaurants owns and operates 84 casual dining restaurants.

Read more about BJ’s.

Why I liked the stock:

  • Stock price was at historically low levels in relative and absolute terms
  • Same-store sales growth down only moderately, in fact one of the better performing restaurant chains in hard hit California marketplace
  • Still opening new locations, albeit at at much slower pace
  • Very good balance sheet with minimal debt
  • Insider buying at lowest levels late last year
  • Great niche player in crowded sit down restaurant space

BJ’s is very similar to Buffalo Wild Wings, albeit a little more diversified in their menu offerings, and a little less expansive in the “sports bar” arena.

BJ’s is a refined balance between a pseudo-sports bar, with a nice casual sit-down dinner space with unique menu offerings as well as the aforementioned handcrafted beer.

In California, BJ’s largest market, the chain was holding up surprisingly well, even where it had overbuilt restaurant capacity in the hardest hit areas where job losses and the home construction collapse has been the worst.

I was looking to play BJ’s as a forward-thinking rebound play in the California housing market/job market…oops…looks like I was a little too late.

Why I am recommending selling the stock:

  • Stock has more than doubled in a few month’s time from around $7-8 to $16 per share
  • Valuation is high (Trailing P/E: 40, Forward (2009) P/E: 30.92 vs. 15.9 for restaurant industry , P/S 1.05 vs. .4 for restaurant industry, etc.)
  • Cash reserves have been dwindling, debt has been increasing
  • Simple concept that has no real moat, consumers might trade up as soon as things improve, or the perception of improvement spurs more refined tastes
  • Not a best in breed player, but a very good restaurant chain. Does not deserve the higher multiples put forth on competitors like Chipotle, Panera, or Buffalo Wild Wings
  • Stock price is 20% higher than average price target of $13.20 per share, meaning expectations are going to be extremely high, and even if analyst’s raise their price targets they are unlikely to raise their stock rating, don’t look for many upgrades even on an earnings beat.
  • Don’t be greedy.

When BJ’s was trading around $8 per share, I was ready to get at least a 1/4 position, but waited to long obviously.

There were some compelling things going for BJ’s including insider buying, and the fact that same-store sales were decreasing but on a much lower level than other similar chains in this space, and it was looking like people just didn’t want to give up their BJ’s Pizookies, and for good reason.

But, as with all the stocks in this sector, greed has gotten the best of this stock as well. It is certainly not worth the premium being bestowed upon it now, and might fall harder than others if it slips at all because it is one notch below other best-in-breed players in the restaurant space.

Bottom Line: BJ’s was a nice little “hidden” restaurant company that I thought I would be able to nab on the hunch that the stronger than expected same-store sales, as well as a coming bottom in the housing industry and the economy overall especially in California, would yield a quick pop in the stock…

I waited to long, and now my thesis has indeed played out, but much too fast, much too soon, and now the stock is rich and overpriced, even with improving fundamentals.

Take your profits now, ask questions later.

Panera Bread:

Yummy Sandwiches, Yucky Stock Price

Panera Bread LogoPanera Bread Company owns and franchises 1,252 bakery-cafes under the Panera Bread and Saint Louis Bread Co. names as of December 30, 2008.

With its identity rooted in handcrafted, fresh-baked, artisan bread, Panera Bread is committed to providing great tasting, quality food that people can trust, highlighted by antibiotic free chicken, whole grain bread, select organic and all-natural ingredients and a menu with zero grams added trans fat.

Panera’s bakery-cafe selection offers flavorful, wholesome offerings, which include a wide variety of year-round favorites, complemented by new items introduced seasonally with the goal of creating new standards in everyday food choices.

Guests enjoy Panera’s warm and welcoming environment featuring comfortable gathering areas, relaxing decor, and free internet access provided through a managed WiFi network.

Read more about Panera Bread.

Why I liked the stock:

  • None - I never liked Panera Bread as a stock. Great company, bad stock. I will say that Panera exhibits some of the characteristics that the other companies highlighted in this article have for advocating purchasing shares at lower levels, such as: no debt, high margins, continued execution in a tough environment, etc.

Unlike the other names on this list, there was never a compelling reason to own shares of Panera Bread in my eyes over the last year or so, and it has been on my “Stocks to short” list for quite some time, although I have yet to pull the trigger because the time hasn’t been right.

I won’t sit here and say Panera is a bad company in any way, but just a very bad stock.

Why I am recommending selling the stock:

  • Stock has been overvalued for about a year now, and even with the recent run up in stocks, and the restaurant sector in particular, Panera has lagged those gains, indicating it’s stock is getting a little tired.
  • Valuation is high (Trailing P/E: 27, Forward (2009) P/E: 22.81 vs. 15.9 for restaurant industry , P/S 1.40 vs. .4 for restaurant industry, etc.)
  • Same-store sales increases have been as a result of increased prices, and a reshuffling of the menu to highlight higher margin, higher cost items.
  • Company’s profitability has been boosted by several cost-cutting measures, including raw materials hedging for ingredients, this will not last
  • Tons of competition in this space, and again once customers regain their financial footing, they’ll be trading in a nice lunch sandwich for a nice dinner somewhere else
  • Stock price is 14% higher than average price target of $52.50 per share, meaning expectations are going to be extremely high, and even if analyst’s raise their price targets they are unlikely to raise their stock rating, don’t look for many upgrades even on an earnings beat.
  • Has been reported in Investor’s Business Daily and Barron’s, means the good times are near finished
  • 31% of the shares held short, people are betting Panera will fall
  • Don’t be greedy.

Panera is a great company that is a favorite to many.

It’s just not a good stock, and hasn’t been for quite some time, but merely offered a safe haven in the restaurant industry while the rest of the industry was cratering.

The fact that Panera has lagged the market’s gains as well as those of its peers should be a troubling sign to you if you are long, as well as the 31% of the shares that are held short.

Bottom Line: I talked about it above, but when a company starts getting coverage left and right, especially in big financial publications, it is doomed.

I never want to see a stock I own being covered in this way.

The smart money has already had its way with these stocks, and the media and other traders (read: non-institutional traders!) are late to the party.

I have been waiting for Panera to break chart, in other words, to show a broken chart pattern before recommending shorting, but that has not happened.

Don’t worry, it will, I am a patient man.

Restaurant Correction Coming

In summary, here are just 4 rapid fire examples of stocks that I know more intimately than others in this industry, but I’m sure I could take time and find many others that are equally deserving of being sold.

What has been happening is that with earnings not missing or beating estimates by the companies that have been reporting, analysts are scrambling to raise their estimates for other restaurant chains, and in turn are raising price targets, estimates, and the whole sector’s valuation has risen, and every boat has risen with the tide.

That tide can quickly decline as fast as it rose, so be prepared, take your profits off the table now, and consider shorting some of these names when the time to do so looks favorable.

There is a day of reckoning to be had, I think we’ll see that day in the restaurant sector before all others.

Source: Restaurants: Is a Correction Coming?