How Peter Lynch Got It Right 20 Years Ago

May 28th, 2013 by Abby Joseph

Submitted by Abby Joseph at Profit Confidential as part of our contributors program.

There’s always strength in numbers.

The equities market is definitely due for a prolonged break, but one subsector I always follow is restaurant stocks. These are key benchmark stocks, and the performance of these stocks offers up an unscientific survey on consumer spending and sentiment.

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So many restaurant stocks experienced a breakout at the beginning of the year. Then they took a break and re-accelerated again.

If there is more confidence in the economic landscape, consumers spend money on eating out or ordering in food.

Restaurant stocks are a group where you can make good money as a stock market speculator. Peter Lynch (the famous manager of the Magellan Fund) always advocated for this sector, telling investors to look here for opportunities. He wrote a chapter on it in his book Beating the Street.

What Lynch advocated, and I agree with wholeheartedly, is that a successful restaurant company must have an experienced and capable management team, proper financing, and a deliberate and methodical approach to expanding the concept. He advocated that a company‘s slow and steady business expansion is what wins the race at the end of the day.

The great thing about restaurant stocks is that they don’t have to have a brand-new concept to be successful.

Cracker Barrel Old Country Store, Inc. (NASDAQ/CBRL) is one of the many companies that have been hugely successful over the last few years.

Cracker Barrel has a price-to-earnings (P/E) ratio of approximately 18 and is yielding 2.3%. The position has doubled on the stock market since the fall of 2011.

The company’s revenues in its latest quarter grew 4.4% to $702.7 million. Comparable store restaurant sales increased 3.3%, while earnings grew an impressive 37% to $35.17 million. The company just boosted its quarterly dividend by 25%.

Among other successful restaurant stocks, we recently considered Bloomin’ Brands, Inc. (NASDAQ/BLMN). (See “Fast Food Breakout: New Names Crushing the Competition.”)

Bloomin’ Brands is the new Outback Steakhouse. The company’s other brands include Carrabba’s Italian Grill, Bonefish Grill, Fleming’s Prime Steakhouse and Wine Bar, and Roy’s.

Since Bloomin’ Brands listed in the summer of 2012, the company has almost doubled in value.

Any aggressive investor should consider restaurant stocks as part of their ongoing search for new positions.

Even during tough times, restaurant stocks can surprise to the upside. McDonalds Corporation (NYSE/MCD) proved this with its value menu during the recession.

There have been a lot of interesting new initial public offerings (IPOs) in restaurant stocks. I would be researching all of them. The key to a good restaurant company is the package: experienced management, good backing from Wall Street, and a deliberate plan for expansion that preserves profitability. Company-owned (not franchised) stores are also a big plus.

There are always going to be new winners in restaurants stocks. Follow the group for the next big thing.

Source – http://www.profitconfidential.com/stock-market/how-peter-lynch-got-it-right-20-years-ago/