BOSTON (TheStreet) -- Small-cap stocks are in a bad place, as investors are favoring safe-haven fixed-income securities because of the wobbly U.S. economy.
The Russell 2000 tumbled 4% yesterday as the U.S. trade gap widened more than economists expected, prompting them to lower their forecasts for gross domestic product growth. Yet, pessimism creates opportunity for value investors.
Einstein Noah Restaurant Group (BAGL), whose ticker denotes its principal product, has risen 9% in 2010, beating the Russell 2000. (Einstein has declined 2.4% since tracking started of the Under-the-Radar Top 10 Portfolio on March 1.) Although the company registered lackluster quarterly numbers, its stock remains an attractive value. And the unwavering support of hedge-fund manager David Einhorn, whose Greenlight Capital is Einstein's largest shareholder, is a reassuring sign to individual investors.
Second-quarter adjusted profit decreased 23% to $3.1 million, or 19 cents, from $4 million, or 24 cents, a year earlier. Revenue declined marginally to $103 million. The gross and operating margins remained steady at 20% and 7%, respectively. System-wide comparable store sales declined 1.1% and company-owned same-store sales fell 2.2%. Although quick-casual favorites Chipotle (CMG) and Panera (PNRA) boosted comparable-store sales by high single-digit percentages, Einstein's shares are significantly cheaper than those of the restaurant darlings.Management is aggressively expanding. Einstein opened one company-owned restaurant, four franchises and four license restaurants during the quarter. It plans to open 10 to 12 company-owned, 12 to 17 franchises and 35 to 46 license restaurants this year. Franchise and license revenue increased 17% during the quarter, ranking as the leading sales category. The company's balance sheet has improved since the year-earlier quarter. Last year's shareholders' deficit has turned into shareholders' equity and the cash balance has more than doubled to $10 million since the year-ago period. Einstein has attracted a slew of loyal shareholders. Greenlight holds almost 11 million shares, about 65% of those outstanding. Royce & Associates, a small-cap investment specialist, is the next largest shareholder, with 3.9% of shares outstanding. It enlarged its position in the latest quarter while Fidelity initiated a 1.8% stake. Greenlight's huge bet on Einstein has attracted a slew of sell-side analysts who normally wouldn't cover a restaurant stock with a paltry market value of $180 million. Technically, Einstein is a micro-cap.
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