Potbelly and Noodles: Should You Buy on Weakness?

After two very hot IPOs, Potbelly and Noodles have fallen hard. Should we be buying on this weakness or are these just companies to avoid?

Jan 14, 2014 at 6:00PM

2013 was an incredible year for initial public offerings, with more than 200 companies joining the market and the majority of them spiking higher in the first day of trading. Two of the hottest IPOs were Potbelly (NASDAQ:PBPB) and Noodles & Company (NASDAQ:NDLS), but both have fallen hard since being in the spotlight. Is this our opportunity to buy, or should we avoid trying to catch a falling knife? Let's find out...

The newborns
Potbelly owns and operates Potbelly Sandwich Shops. Its products include sandwiches, soups, salads, and shakes, all of which are made fresh to order. The company's vision is to become "The Best Place for Lunch" in every market in which it opens a location. Potbelly was founded in 1977 and went public in October 2013.

Pbpb

Noodles & Company is a fast-casual restaurant chain that offers the world's favorite noodle dishes, sandwiches, salads, and soups. The core principle of the company is that quality food can be served fresh, fast, and in an inviting atmosphere, without emptying the wallets of its customers. The company was founded in 1995 and went public in June.

Ndls

First day pops & rallies
On Oct. 4, 2013, Potbelly went public at $14 per share, but the market had other ideas; shares opened for trading at $28.66 and ended the day 119.8% above the IPO price at $30.77. The stock continued higher over the next trading days, reaching its highest level to-date, $33.90, on Oct. 8, 2013.

Noodles' shares hit the market on June 28, 2013 at the price of $18, but it too opened much higher than that; it opened for trading at around $35 and ended the day up 104.2% at $36.75. The stock continued rallying, reaching its 52-week high of $51.97 on July 2, 2013, 188.7% above the IPO price. 

Drop it like it's hot
Since the aforementioned 52-week high of $33.90 for Potbelly, it has fallen more than 27%. However, this has nothing to do with an earnings miss in its first report on Nov. 12, 2013; take a look at the results versus the expectations:

Metric Reported Expected
Earnings Per Share $0.15 $0.09
Revenue $78.0 million $77.88 million

Potbelly's earnings per share increased 25% and revenue rose 11.7% year over year as comparable-restaurant sales grew 2.5%; the beat sent shares surging 9.3%, but it has fallen more than 24% since.

The decline began when more and more analysts began comparing Potbelly to Panera Bread, and a debate began as to whether Potbelly could grow at the same pace. This is never a good way to look at things because Potbelly is focused on "operating the business and delivering long-term shareholder value." These are the words of Potbelly's CEO, Aylwin Lewis, and I believe he knows how to keep expansion going while remaining competitive in the industry.

If anything, Panera investors should be worried about Potbelly taking share. With this said, Potbelly is now trading below the level it opened on the day of its IPO.

Noodles' stock price jumped around for several weeks after its IPO before starting a steep decline after reporting earnings on Nov. 6, 2013. Here's an overview of the results:

Metric Reported Expected
Earnings Per Share $0.11 $0.11
Revenue $88.9 million $91.0 million

Earnings per share grew to $0.11 from $0.01, and revenue rose 15.4% year over year; comparable-restaurant sales increased 2.4%. These may seem like solid numbers, but they were not enough to satisfy investors. The stock declined 9.8% after the report, from $46.66 to $42.10, and things got worse when the company announced a secondary offering of 4.5 million shares at the price of $39.50 on Dec. 5, 2013. Noodles has fallen more than 24% since reporting and now sits more than 31% below its 52-week high, which is below the closing price on the day of its IPO. This leaves investors wondering if now is the time to buy or if the decline will persist.

Should we buy?
After reviewing the earnings reports and reasons for the declines, Potbelly is the only one investors should consider for investment. Noodles' report was not bad, but I strongly dislike how the company proceeded to do a secondary offering during a massive sell off; I believe it should have held off and waited for the stock to regain strength to go on with the secondary.

In terms of valuation, both companies trade at more than 60 times 2014's earnings estimates, so it would be smart to wait for the next round of earnings reports to come out before making any investments; the companies will give updated outlooks, and I believe those will be the key to sending the stocks higher.

The Foolish bottom line
Potbelly and Noodles were two of the hottest IPOs in 2013. After strong runs, both fell from glory quickly and now sit below the levels reached in the first days of trading. Potbelly is the better investment opportunity of the two, but I would wait for the next earnings report to come out before putting your money to work. If it can deliver on earnings and guidance, Potbelly could easily outperform the overall market and be a top performer in the restaurant industry.

1 stock expected to crush the market in 2014
There's a huge difference between a good stock, and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Joseph Solitro has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers