Restaurant Stocks to Nibble in '07

This column was originally published on Street Insight on Dec. 26. It's being republished as a bonus for TheStreet.com and RealMoney.com readers. For more information about subscribing to Street Insight, please click here.

So what's on your menu this week? Some leftover latkes from Hanukkah? Perhaps some smoked ham cold cuts from Christmas?

Looking into 2007, there are several themes in the restaurant sector that will continue to create investment and trade opportunities. Here is my restaurant year in review, and a peek at the year ahead.

Casual Dining

I believe casual dining will struggle in 2007, as the concepts out there are simply too homogenous, and I see no new offerings on the horizon. Rather, you will have to trade subsector, looking to take a lead from economic signals.

Commodity costs -- namely, energy and food -- should be watched closely. There are some potential turnaround stories as well that could provide opportunities, and one name that comes to mind is Red Robin Gourmet Burgers (RRGB Quote), which is a great concept that has long suffered from managerial mismanagement and misdeeds. Watch Red Robin, but don't rush to act.

This was a really up-and-down year for casual dining. A strong start to the year was thwarted in the spring by a market correction, spiking energy prices and the fear of inflation.

These companies were hit hard as traffic migrated down the food chain to the quick-service restaurants as the "substitution effect" took hold, which states in short that when consumers have less money to spend, they shift from higher-priced to less expensive goods.

Not until energy prices peaked, the market correction ended and the Fed finally pushed pause in the middle of the summer did the casual dining chains begin to rebound.

OSI Restaurant Partners (OSI Quote), which operates the Outback Steakhouse chain among others, managed to get a private-equity buyout offer. All of the popular casual-dining chains had similar chart patterns during the year. Here are some of the favorites charted together: Applebee's (APPB Quote), Darden Restaurants (DRI Quote), Brinker International (EAT Quote) and Ruby Tuesday (RI Quote).

Good Eatin'? An up-and-down year for these names

Source: CTS Trend