There are several stock categories that can return 100 times your money.
I call these stocks “100-baggers” — and needless to say, they’re pretty exceptional.
But you might be surprised to learn that one of the most overlooked 100-bagger categories is restaurant stocks.
Peter Lynch, who ran Fidelity’s Magellan Fund, and is one of the greatest investors of all time, had a whole chapter on restaurant stocks in his classic book, Beating the Street (1993).
I still have my original hardcover, which I’ve read a number of times. It had a big impact on me when it was first published. I was just out of college and trying to figure out this investing game. His influence has stayed with me.
In his book, Lynch talks about how every region of the country incubates some small restaurant chain that eventually goes on to enjoy national success. He cites a number of big winners in his book: Shoney’s (168-bagger), Bob Evans (NASDAQ:BOBE) (83-bagger), Kentucky Fried Chicken (27-bagger), and many more.
Of course, restaurant stocks can get stale. But when they begin their march across the country, they can be wonderful investments.
Right now may be a particularly good time to look at this industry because many restaurant stocks are having a hard time. Sales growth is slowing, or has even dipped into slightly negative territory. And higher labor costs are crimping profit margins.
As a result, many restaurants’ share prices have declined, and they’re not trading at the big valuations they often command.
Take a look at Fiesta Restaurant Group (NASDAQ:FRGI), for example. It owns two small regional restaurants, Pollo Tropical and Taco Cabana.
After hitting $55 per share, where it traded for more than 33x earnings, the price has been more than sliced in half. It now trades for 17x earnings.
However, while the sizzle is out of the stock, the appealing economics remain.
Fiesta earns about a 25% cash-on-cash return when it opens a new restaurant. (Meaning if it opens a new location for a cost of $2 million, it’ll earn a $500,000 annual profit on that location.) Darn good.
And that’s not unusual.
Here’s a cherry-picked group of restaurants in the so-called casual dining space. You can see that the median cash-on-cash return for the group is 30%:
I’m not saying all of these stocks are buys. But I am saying that restaurant stocks are an interesting place to fish for big winners.
Restaurant stocks may face macro headwinds today — slumping sales growth and rising labor costs — but these factors won’t last forever.
While it’s true that the restaurant business has endured more than its share of busts, if you stick with stocks that have excellent economics and you don’t over-pay, you tilt the odds in your favor. It worked for Lynch for decades… and it’s still a good concept today.