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Buffalo Wild Wings: Be Cautious With Your Expectations


In addition, the performance results during this period have been especially spectacular. A hypothetical $10,000 investment on 10/31/2003 would be worth over $130,000 today -- a nearly 29% annual gain and over six times what a comparative investment in the S&P 500 index would have achieved.

For those looking at the future prospects of the business -- along with the past results displayed here -- it seems that Buffalo Wild Wings is an especially compelling company. Thus, when you find out that the price has dropped by about 5% in less than a month, you might be thinking this could signal an opportunity to take a closer look.

In the case of Buffalo Wild Wings, however, I would express great caution on this front.

On Nov. 21 shares traded near $152 as compared to Thursday's close of just above $142. Yet what is not apparent from viewing short-term price action alone is the idea that business operations and price movements can vary largely from one another.

In the long term, price generally catches up or falls back toward long-term earnings prospects, but in the short-term anything can happen. Or in Ben Graham's words: "In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine."

Today, Buffalo Wild Wings offers a perfect example of a stock that has become disconnected from its underlying earnings. Below I have included the Earnings and Price Correlated Graph for Buffalo Wild Wings. Note that this graph is precisely similar to the one above, except now it plots price (black line) along with operating earnings over time.

Notice that Buffalo Wild Wings' normal P/E ratio over this time period has been about 26, and up until this year the stock price more or less oscillated about this mark. Recently, however, the price has jumped exorbitantly -- to a P/E ratio above 40 -- while the earnings continue to move along.

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