“Fast Casual”: New Buzzword Among Risk-Capital Speculators

by Mitchell Clark, Profit Confidential

The great thing about noodles is that they’re cheap-and this is also what makes a restaurant chain selling noodles a very good investment opportunity.

Restaurant stocks should always be on any speculative investor’s radar. Consumers’ tastes change, disposable incomes change, and so on…but there is always fervor to eat out, especially at the right price point.

The latest buzzword in the world of chain restaurants is “fast casual,” a combination between a fast food quick-service outlet and a sit-down casual restaurant. There’s going to be more and more of these types of chains coming to the market, and there have already been some hot (and expensive) initial public offerings (IPOs) in this sector recently.

Among several fast casual restaurant stocks that recently listed, Noodles & Company (NDLS) out of Broomfield, Colorado just opened another 12 locations in its 2013 fourth quarter, bringing its total corporate-owned locations to 318, with 62 additional franchised restaurants.

Typically, developing restaurant stocks that can offer the most capital appreciation potential on the stock market are those with a large number of corporate-owned locations. This enables management to keep full control over operations, while improving the concept as business conditions and geographic locations dictate.

Noodles & Company came to market selling 5,357,143 shares at $18.00 a share with an overallotment of 803,571 shares. Illustrating the speculative fervor for restaurant stocks at the time, the company’s shares opened around $36.00, and then proceeded to appreciate to $47.00 a share before consolidating for the rest of 2013.

Recently, the company announced preliminary fourth-quarter results that came in just shy of the Street’s estimates.

Fourth-quarter 2013 sales are expected to be approximately $91.5 million for a gain of 17.4% over the fourth quarter of 2012. Comparable restaurant sales are estimated to gain 4.3% for corporate-owned locations. The company franchised an additional four restaurants in the most recent quarter.

Like many newly listed stocks, there are a lot of high expectations built into the numbers for this company, and last year was perhaps the most ideal time for a company to sell shares to the marketplace.

Noodles & Company sold off on its preliminary fourth-quarter numbers, and I think speculative investors should now put this growing chain on their radar. IPOs are almost always overpriced, but that doesn’t mean that the underlying companies aren’t growth stories.

IPOs often sell off on corporate developments that don’t quite meet or exceed Wall Street’s expectations. But IPOs often retrench in price after listing, and even more often, speculative investors can pick them up at better prices than recently traded.

Trading stocks that are new listings is all about managing expectations and risk-both those related to what the Street is looking for and those achieved by the underlying business. (See “Two Old Restaurant Stocks Offer Investors Growth.”)

Restaurant stocks come and go, but when the action in the broader market is decent, they can often turn out to be very good moneymakers for risk-capital speculators.

Any aggressive equity market portfolio would be well served by having some exposure to this sector. Restaurant stocks were a favorite of the famous money manager Peter Lynch, and this investment theme has not gone out of style. (See “How Peter Lynch Got It Right 20 Years Ago.”)

This article “Fast Casual” the New Buzzword Among Risk-Capital Speculators was originally published at Profit Confidential