Casual Dining Makes for Exciting Investments

The restaurant industry has hit some sour notes of late. High gasoline prices, lower real estate prices and other financial pressures on consumers have prompted them to be more selective about when they dine out and where, while upward pricing pressure from such factors as increased minimum wages have sandwiched the restaurant industry, so to speak.

When weakness in an industry becomes apparent, like there is now in the restaurant industry, I like to take a closer look to see if there are any diamonds in the rough -- solid performers whose stocks are trading lower than they should be because their industry has is out of favor.

The Lynch Strategy

I found there are a few casual dining companies that have the attention of the guru strategies I use to analyze stocks. All of these could be winners when the industry is in better favor. One is Darden Restaurants (DRI - commentary - Cramer's Take), whose flagship chains include Red Lobster, the largest seafood chain, and Olive Garden, the largest Italian chain. Other concept restaurants it operates include tropical-themed Bahama Breeze and barbecue chain Smokey Bones Barbeque & Grill.

Peter Lynch's strategy, as I interpret it, finds Darden hot and spicy. Considered a "true stalwart" because its earnings growth (based on the average three-, four- and five-year EPS growth rates) of 16.08% is within the 10% to 19% range, Darden just makes the grade in terms of Lynch's famed P/E/G ratio. This ratio, which relates the P/E ratio to growth, is at 0.99 for Darden, just under the 1.00 maximum. Other things Darden has going for it include positive earnings per share ($2.27) and a somewhat high, but acceptable, debt-to-equity ratio.

Panera Bread Company (PNRA - commentary - Cramer's Take) is another stock the Lynch strategy finds palatable. The company -- whose bakery/café concept is something of a cross between fast food and casual dining -- serves salads, soups, sandwiches and baked goods. It operates in about 1,000 locations, with a combination of franchised and company-owned outlets. With a P/E of 32.63 and a solid growth rate of 38.14% (based on the average of the three-, four- and five-year historical EPS growth rates), Panera's P/E/G is a desirable 0.86. Also in its favor is its debt -- of which there is none.

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At the time of publication, Reese held no positions in the stocks mentioned, although holdings can change at any time.

John P. Reese is founder and CEO of Validea.com, an investment research firm, and Validea Capital Management, an asset management firm serving affluent investors and companies. He is also co-author of the best-selling book, The Market Gurus: Stock Investing Strategies You Can Use From Wall Street's Best. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Reese appreciates your feedback. Click here to send him an email.

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