NEW YORK (TheStreet) -- The bull market in restaurant stocks may finally be showing signs of fatigue.
The sector has been on fire for much of the past five years, with average annual returns during that period for the 40 or so restaurant stocks I track at above 40%. But with the average price-to-earnings ratio above 33, it may be time for a breather.
Year to date, the restaurant stocks I track are up an average of 1.3%, which still beats the S&P 500 (+0.85%), but is behind the Russell 2000 (+2.1%), which may be a more appropriate benchmark given the restaurants' average market capitalization.
Famous Dave's is up almost 40% year to date, and has surged recently on better-than-expected quarterly earnings and the announcement that Ed Rensi, former president of McDonald's USA, will be taking the helm as CEO.
The stock, which had been languishing in obscurity, now trades at an all-time high. Part of that obscurity is due to the company's relatively small market cap, which is just under $200 million. That's tiny considering the company's 194 locations (54 company-owned, 140 franchised).
Famous Dave's has also reduced shares outstanding by almost 30% since 2007 through buybacks, giving it a relatively small float.
For the restaurant sector overall, it appears as though the easy money has already been made, and from here, gains will be more with special situations such as Famous Dave's than with the stellar growth enjoyed by the Chipotles of the world. There also may be some additional transactions that will generate gains for shareholders, such as the agreement by private-equity firm Apollo Global Management to acquire CEC Entertainment, which was announced last month.
For a specific stock, Einstein Noah Restaurant Group (BAGL) is intriguing. It's a reasonably priced niche stock trading at 15 times 2014 earnings estimates, with a dividend yield of 3.3%, and hedge fund manager David Einhorn's Greenlight Capital owns more than 38% of the company.BAGL data by YCharts
There may also be some upside from some of the chains that have struggled during these otherwise great years for restaurant stocks.
Ruby Tuesday (RT) is one example; the company can't seem to get its act together from an operational standpoint, but is compelling because of its real estate. Despite a rather small enterprise value at just below $600 million, Ruby Tuesday owns the land and buildings for 324 locations, and the building only for another 265. That's a formidable portfolio of real estate, which could be attractive to an acquirer.
Then there's the situation at Darden Restaurants (DRI), which intends to spin off its stagnating Red Lobster brand.
The company is under pressure from activist investor Barington Capital Group, which is pushing for the company to spin off its vast real estate holdings into a publicly traded real estate investment trust. Starboard Value LP, a hedge fund that owns 5.5% of Darden, is pushing for the Red Lobster spinoff to be put to a shareholder vote. Stay tuned to this situation, it could get interesting.DRI data by YCharts
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.