Passing Up a Tasty Double

If every investor makes mistakes, then passing up Nathan's Famous (Nasdaq: NATH  ) has to qualify as one of my real whoppers.

Rewind to late 2004. I had recently covered the hot dog maker's second-quarter earnings. At the time, the stock was trading for $6.40 a stub. Shareholders' equity had gone nowhere for the better part of a decade, but growth was on the upswing; sales were up 16%, and net income was up 27% in that year's Q2. What's more, a back-of-the-napkin valuation suggested the shares were at least 25% undervalued.

But did I buy? Noooooooooo.

Moron. I gave up a double from yesterday's close and, in the process, chose to ignore one of the best micro-cap businesses in America. Indeed, Nathan's is solidly profitable today and sports one of the best balance sheets I've seen for a restaurant. Its sturdy net cash position is eerily reminiscent of the one at Motley Fool Hidden Gems selection Buffalo Wild Wings (Nasdaq: BWLD  ) .

And the business is still improving. Consider Nathan's Q1 2007 results. Sales were up 8%. Net profit was up 19%. And while gross margin in the restaurant business declined by 1.4%, a 17.8% increase in sales of Nathan's branded hot dogs to supermarkets led to big gains overall, including a better than 2% improvement in operating margin. Nice.

So, could this stock keep gaining? A revised back-of-the-napkin valuation says yes. Assuming only market-matching EPS growth and a restaurant industry average multiple of 19 times earnings, my math places the shares at $27 in five years. But that may be conservative if Nathan's financials continue to improve.

Or the firm could backslide. I just wouldn't bet on it. Over the past two years, Nathan's has burned bears like me crispier than a classic dog at a Fourth of July barbecue. Today, the grill is hotter than ever. You've been warned.

Smell that? Mmmmm, it's related Foolishness:

Buffalo Wild Wings is aMotley Fool Hidden Gemspick. Try Hidden Gems today, and get insights on all of the firms that are helping Tom Gardner and Bill Mann wallop the market by more than 20% as of this writing. An all-access pass is free and good for 30 days. All you have to lose is the prospect of richer returns.

Fool contributor Tim Beyers likes his hot dogs burned and crispy, and his steak medium and juicy. He owns shares of Buffalo Wild Wings. Get a peek at everything Tim is invested in at his Fool profile. The Motley Fool has an ironclad disclosure policy.

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