buffalonate (96.90)

The Fastest Growing Small Retail Chains

May 18, 2011 – Comments (10) | RELATED TICKERS: CMG , BWLD , ULTA

I read Peter Lynch's One Up on Wallstreet several years ago and started looking for the highly successful regional chains that he was a fan of investing in.  He believed that small successful chains had a proven blueprint for success and would grow earnings much faster than the larger chains because they had more room to expand.  He also believed that the correct way to value a stock was that the p/e ratio should equal the earnings growth rate.  I invested in 3 at the time that I thought fit the profitle and they were Buffalo Wild Wings, Joseph S Bank, and First Cash Financial Services.  I am up over 140% on all three of them since then.  Since this strategy was so successful for me I recently started looking for more chains to invest in.  I am also going to show the percentage that their earnings have grown from 2006 to 2010.  Here is what I found. 

                                      p/e          earnings growth rate 2011   earnings growth from 2006 to 2010

Buffalo Wild Wings            26                     42%                                             235%

Joseph S Bank                 18                     21%                                             100%

First Cash Financial          17.7                   52%                                             560%

BJ's Restaurant                53                     56%                                              238%

Fossil                              25.5                  55%                                              330%

PF Chang's China Bistro   18                     21%                                              80%

Panera Bread                   31.8                  24%                                              90%

Ulta Salon                        48                    49%                                               900%

Rue 21                             25                     41%                                              385%

Ross Stores                     17                     27%                                              230%

Texas Roadhouse             20                     10%                                              70%

Chipotle Mexican Grill        47                     22.7%                                           431%

Lumber Liquidators           27                     -17%                                             100%

I wish I was smart enough to find these companies years ago.  I own most of these and think they are a good value except Panera, Texas Roadhouse, and Chipotle Mexican Grill.  I am hoping there is a big enough pullback in these stocks that it makes sense to buy them.  Chipotle's and Texas Roadhouse's earnings were hurt last quarter by inflation.  Lumber Liquidators still hasn't recovered from the recession and is having trouble with its new inventory management system.  I hope this was helpful.  If you know any other good small retail chains ideas let me know.  Hope this is helpful.  Most of these were featured on Forbes Magazine's list of most successful small companies.