5 Reasons This $2 Pizza Stock Could Outperform Chipotle And Panera

| About: RAVE Restaurant (RAVE)

Many of us would like to go back in time for a chance to invest in a company like Chipotle Mexican Grill (NYSE:CMG), Panera Bread (NASDAQ:PNRA) or Buffalo Wild Wings (NASDAQ:BWLD). These companies have provided explosive returns for shareholders and still continue to grow.

As an example, Chipotle shares were trading for about $50 in 2009, and went on to recently trade for over $400. Panera went from about $43 in 2009, to nearly $160 today, and Buffalo Wild Wings shares, just about $23 in 2009, recently peaked out around $90.

All of these brands demonstrate the power of a strong concept and the viability of affordable dining with sandwiches, burritos, etc. We can't go back in time, but we can look for new concepts that offer unusually strong potential. While Panera, Chipotle and others have been great stocks for the past several years, these companies are much more mature now, and smaller companies could be poised to grow faster and outperform those stocks going forward.

The pizza business is huge, with an estimated $40 billion per year in sales. Plus, pizza works in a tough economy because it is more affordable compared to other food options, and almost everyone likes pizza. A company called Pizza Inn Holdings Inc. (PZZI) owns both Pizza Inn restaurants and a new small, but fast-growing chain called Pie Five Pizza. The stock appears very undervalued based on current operations, but what is really exciting is the growth potential of this under-the-radar company because of a new concept it has developed.

This company recently won the prestigious 2012 Hot Concepts! award for its Pie Five Pizza division from Nations Restaurant News, which tracks the industry for innovative new concepts with high growth potential. Since the Pie Five concept was launched in the summer of 2011, the company has opened 6 restaurants and a 7th restaurant is now under construction. Because the concept has proven to be very promising, the company is planning for expansion and it has announced plans to franchise and develop multi-unit franchise agreements.

The Pie Five concept offers customers a chance to custom-order everything from the dough, which is made from scratch twice a day, to premium sauces and toppings, which are made before them, and then baked within 5 minutes. Plus, the pizza only costs $6.49, making it affordable for lunch or dinner, and able to compete with the price of a sandwich or burrito. The Pie Five restaurant design is "industrial chic" and the locations are set in upscale neighborhoods. The website for Pie Five Pizza shows the locations (currently all are in Texas), the menu options, and invites customers to "Join the Pizza Revolution."

The opportunity to buy the stock at cheap levels may not last for long. Earlier this year, these shares even trading over $6, but the stock dropped along with the markets and also because the company reported only a penny per share in earnings for the fiscal third quarter, which ended on March 25, 2012. But a big reason for the lower earnings was because of pre-opening costs associated with new company-owned Pie Five restaurants.

Short-term thinking by some investors has created a new buying opportunity for those with more patience. Aside from the exciting new Pie Five Pizza concept, there are a number of other reasons why investors should consider buying this stock while it is still cheap:

  1. Multiple insiders at this company have been buying shares, and in the last few months over $160,000 worth of stock has been bought at prices ranging from $2.25 to $4.81 per share.
  2. The company has a strong balance sheet with about $700,000 in cash and just around $1.86 million in long-term debt. The company is profitable and it has about $44 million per year in revenues. This means a fast-growing new concept like Pie Five, could make a significant impact on revenues.
  3. Buyout potential: There are plenty of companies that have the resources to buy Pizza Inn, just to gain control of the new Pie Five concept. Companies spend millions to develop new menus and concepts, so a buyout of Pizza Inn could make sense for a major restaurant company to pursue, especially since the Pie Five concept is showing early signs of fast-growth potential that could be taken to a national level. Companies like Papa John's (NASDAQ:PZZA) and Domino's (NYSE:DPZ) might seem like obvious choices, but a company seeking to enter the pizza market or private equity, might even be more motivated to acquire a hot new concept like Pie Five for national development.
  4. This company is expanding into emerging markets, like China and a some countries in the Middle East. Pizza Inn already operates about 310 restaurants domestically and internationally (about are 79 international locations), so rolling out the Pie Five concept could come at a healthy pace. In late 2011, the company signed a five store agreement in Hangzhou, China, and more international expansion is planned.
  5. Some smart money has been buying and holding this stock: Newcastle Partners, L.P. now owns about 21% of the company. Newcastle is a hedge fund that is focused on investing in small-cap value stocks. Also, insiders including Mark Schwarz have a major stake in the company. Recent data shows he owns over 6 million shares.

Obviously there is a lot to like here, and the shares look very undervalued, especially considering the growth potential. One analyst sees this stock eventually going to $11.50 per share as the Pie Five rollout progresses. Whether or not this stock becomes the next "mini" Chipotle or Panera, it appears to have plenty of upside at current levels.

Key Data Points For Pizza Inn:

  • Current Share Price: $2.48
  • 52-Week Range: $2.18 to $7.07
  • Dividend: none

Data is sourced from Yahoo Finance.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PZZI over the next 72 hours.

Disclaimer: No guarantees or representations are made. Please consult a financial advisor before making investments.

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