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Food for thought

: With restaurant stocks, it's always just a matter of time before they cause indigestion for investors.


. That's why many shorts have

P.F. Chang's China Bistro


on their radar screen. Note I say "radar screen."

"It's too early," comes the usual response, in part because regular grass-roots checks show the units continue to be jammed. However, with nearly 19% of the stock sold short, plenty of others are betting the odds are increasing that the fundamentals of the Chinese restaurant chain, which currently has 39 units nationwide, will stumble sooner rather than later.

"If there's just one contra indicator," says one observer, "the wheels come off the momentum." And what momentum there has been. In recent months, P.F. Chang's has been as hot as the market has been cold, and it trades at one of, if not


, highest multiples in the restaurant industry: 56 times trailing earnings vs. 27 times for


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, eight times for

Tricon Global

(YUM) - Get Free Report

and 19 times for

Outback Steakhouse



What makes P.F. Chang's especially compelling to some shorts, however, is that Chinese restaurants have never done well in national rollouts; there hasn't been a successful one (at least, not yet). And P.F. Chang's is running low on cash. As of last quarter, the company had only $5 mil of cash, and it had already dipped into its $15 million credit line. Yet to accomplish the rollout of 15 new units this year, it needs at least $15 million (after taking into account internally generated cash). That means the company will either have to issue new stock (in this environment?!) or head to its banks (with rising interest rates?!).

What more, with a restaurant that operates in such a narrow niche, such as Chang's, the more restaurants it opens, the more likely it is to hit locations that simply don't work or that fail to increase body count after the first year. One example -- Westbury, Long Island -- is a notable flop. CFO Robert Vivian concedes the location hasn't worked as well as expected, but blames it on "operational" issues that he says have been corrected. (Time, of course, will tell.)

Vivian also isn't worried about cash. He says the company easily could issue more stock if it wanted, but has opted for a new $40 million to $45 million credit facility that will be in place by the end of the current quarter. He says that would be "sufficient capital" to fund the company for the next few years. What about rising rates? No prob, he says: The rate is likely to be "better" than the rate on the existing credit line.

Still, the company has warned that by year-end, comp-store sales growth could slow to around 5% from around 13% today. "We've enjoyed almost unprecedented comp-store sales increases through our entire history," Vivian says. "I've always cautioned that we don't believe we can sustain them, but I have no idea when that will change ... if it will change. As our system gets large and our stores get older, certainly comp-store sales will slow."

And that, the shorts say, is


the first sign of trouble for a fast-growing restaurant company like P.F. Chang's. Another is insider selling, such as the recent wave among top execs, including founder Paul Fleming. (Vivian says Fleming's sales are part of a deliberate plan to lower his stake to just under 10%.) Coupled with rising beef and shrimp prices, and Chang's vow to hold the line on prices, the result, say some bears, could be less than tantalizing. (Of course, this column

raised unappetizing questions about

Cheesecake Factory

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a year and a half ago, when the stock was around 23; it's 47 today, with no signs of a slowdown.) It's all a matter of timing.

Herb Greenberg writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.