Finding the "Next Chipotle."
There's been a little cliche floating around investor circles for some time now: "(insert restaurant company name) IPO/stock is the next Chipotle!" Frankly this cliche annoys the living daylights out of me for a couple of reasons.
#1: The company may not be related.
Oftentimes when this cliche is eagerly breathed by hopeful investors in a hot new restaurant stock, they aren't even considering the idea that the stock in question is in no way related to Chipotle's style or is even in the fast-casual sector. For example, take El Pollo Loco (NASDAQ:LOCO), a stock I hold a firm redthumb on in CAPS. Inherently, El Pollo Loco is not a fast-casual brand - it's just got the "fast" part of the equation. Like McDonald's or Burger King, El Pollo Loco is a fast food chain, but with a Mexican food slant, like Taco Bell. While there may be some room for growth for El Pollo Loco, the current valuation is quite rosy for a company in the midst of the "next Chipotle" feeding frenzy.
#2: The phrase encourages a "buy before you look" mentality.
About ten months ago, I was keeping track of two upcoming IPOs to potentially invest in: RE/MAX and Potbelly (NASDAQ:PBPB). Admittedly I was interested in Potbelly due to the "next Chipotle" talk as well as the seemingly good growth numbers. But after researching and mulling it over, I bought shares of RE/MAX instead of Potbelly. Check out the stock charts from their IPO dates to now, and you'll see that if you bought RE/MAX instead of Potbelly, you'd have a strong dividend-paying stock with solid growth and share appreciation. Potbelly, on the other hand, has declined precipitously from its IPO price, as investors sent the stock soaring to around $30 a share. The stock sits at $12 now.
What is my point in this little example? Cliches like "the next Chipotle" encourage prospective investors to leap before they look into a company's fundamental valuation and business prospects. I'm certainly not saying everyone who purchased Potbelly shares held this mentality or did not do their homework; I'm sure some people bought RE/MAX without research and Potbelly with hours of research. The takeaway is that cliches like "the next Chipotle" can be deceiving and dangerous if you don't do your due diligence.
#3: Actual numbers tell the real story.
Theoretically, one could slap the label "the next Chipotle" on any new hyped restaurant stock without considering what makes Chipotle so uniquely special. Chipotle has found a niche market and has exploited it extraordinarily well. Management is wise and keeps costs under control, juicing margins and making Chipotle flush in cash. Seriously, what other restaurant has been able to post double-digit growth in same-store sales quarter after quarter after quarter, and also continue to have some of the highest margins in the industry?
Enter Noodles and Company (NASDAQ:NDLS), yet another firm hyped to be the next Chipotle. The margins and growth over at Noodles cannot even compare to Chipotle. Noodles' margins are quite low, and the same-store sales are only in the middle single digits. The stock has been rather volatile and lately has performed quite dismally. The actual numbers and cold, hard facts paint the real picture, not an artificial, superficial label.
Overall, while any of the three companies mentioned may indeed provide attractive investment opportunities in the future, it seems the "next Chipotle" hype does more harm than good. Rather than following the crowd and excitedly buying shares based on the hype, look deep into a restaurant stock's financials and performace to see if there is shareholder value to be unlocked.