Why You Want These Two Restaurant Stocks

Restaurants stocks like Darden Restaurants, Inc. (NYSE:DRI), McDonald's Corporation (NYSE:MCD), Buffalo Wild Wings (NASDAQ:BWLD), or even the relatively obscure Einstein Noah Restaurant Group, Inc. (NASDAQ:BAGL) don't exactly inspire dreams of investment riches - it's just not a group known for big payoffs in short periods of time (like biotech is). On the other hand, in a year like 2011 has been so far, the upside of these 'predictable names' comes shining through.

You can rank it in any timeframe you want.... year-to-date, six-months, six weeks, or six days - the restaurant index hasn't led the market in any of them. The S&P 1500 Restaurant Index (yes, it exists), however, has been in the top 10% of leaders for ALL those timeframes... the proverbial bridesmaid for all time periods, but never the actual leading 'bride'. Still, as a result of that consistent strength fueled by the likes of MCD and DRI, the restaurant industry has carved out a very respectable 24.5% gain for the year so far. It sure beats the market's 4.0% gain for the same timeframe.

To be fair, it was a deserved rally. More than that though, the persistence of the well-paced rally bodes well for the bulk of these stocks, since the group's performance is responsible for nearly half of an individual stock's rise or fall.

Investors looking for the best opportunities in this proven sector though, need to think outside the box.... beyond Darden Restaurants, and beyond McDonald's Corporation. Both are fine companies, but it's names like Einstein Noah Restaurant Group and Buffalo Wild Wings that are going to dole out bigger rewards by following the trail blazed by their bigger counterparts.

Buffalo Wild Wings is a $1.1 billion company operating 773 chicken wings restaurants throughout most of the United States. More than that though, it's profitable.... and growing... a lot. The top line has grown every year for the last five, soaring from $290 million in 2006 to $613 million last year. It should reach $761 million this year, and a whopping $940 million next year. That's unparalleled growth for any industry, but especially for the restaurant business.  

Profits have also grown accordingly for BWLD, from $1.10 per share in 2007 to $2.10 last year; look for $3.23 next year.

And make no mistake - Buffalo Wild Wings didn't even flinch even when the 2008 recession was at its worst.

Einstein Noah Restaurant Group hasn't seen quite as much growth, but as a smaller company that's still trying to grow roots, a little more volatility could be expected.

BAGL is a $233 million company with 730 restaurants operating under Einstein Bros., Noah's New York Bagels, and Manhattan Bagel monikers. The top and bottom line have been reliable, but stagnant. It's one of those companies that seems perpetually on the verge of a breakaway year, but for one reason or another seems to hit a roadblock every time it gets ready to hit the gas (rising expenses, recession, etc.).

Something is going right for the company though, and it just may be enough to get investors hooked and bullish.

Beginning this year, Einstein Noah Restaurant Group started paying significant dividends. In fact, the yield has reached a very respectable 4%. That's better than the yields from Darden Restaurants and McDonald's Corporation, and easily tops Buffalo Wild Wings in that category - "BW3's" doesn't pay a dividend at all. At the same time though, Einstein Noah Restaurant Group offers investors at least a shot at growth, as consumers continue to move away from most quick-service, traditional fast-food offerings. Its specialty bagel shops aren't just bagels; it sells sandwiches and meal packages that are gaining traction among the health-conscious as well as the taste-conscious.

BAGL is priced attractively at a forward-looking P/E of 15, while BWLD trades at 19.5 times its projected earnings. That's on the high side, but it's not unreasonable considering Buffalo Wild Wings grows earnings at a rate of 32% per year. McDonald's and Darden don't even come close to that.

Between the industry's strength and their underlying stories, these two small cap, relatively unknown restaurant stocks could dish out some pleasant surprises.