Ask my eldest son what he liked most about our recent vacation to California, and you'll get none of the usual responses. Disneyland? Sure. Legoland? Yeah, but it would have been nice to actually use his Lego gift card. Sea World? Cool dolphins -- but where are the sea turtles?
And, really, what's the deal with mixing a beer garden with a giant fish tank? What, no chips and tartar sauce? (Whoops, that's me.)
What our 8-year-old most enjoyed about our trip was the frequent stops at In-N-Out Burger. Me, too -- because In-N-Out is the best company I've ever seen.
Quality your portfolio can taste
So what's so special about In-N-Out Burger? Let me count the ways:
- It's family-owned. Since 1948, when Harry and Esther Snyder founded the first drive-through in Baldwin Park, Calif., In-N-Out's owners have maintained control over the business. Burger King (NYSE: BKC ) -- home of the Whopper and the creepy mascot -- is 99% owned by institutional investors such as Goldman Sachs.
- It follows a disciplined growth strategy. In-N-Out insists on using fresh ingredients for its burgers and fries. All 200-plus locations are within trucking range of its Baldwin Park beef commissary. Expansion beyond southwest Utah would require freezing and, from management's view, damage the brand. Krispy Kreme's (NYSE: KKD ) disastrous franchising strategy is all the evidence I need to agree.
- It attracts insanely loyal customers. Plenty of novelty restaurants have merchandise. Even Starbucks (Nasdaq: SBUX ) does. But would you really wear a Starbucks shirt or show off your Starbucks mug in public -- even when you're not jonesing for what's inside? Perhaps a few of you would, but not to the degree that In-N-Out's customers do. Branded T-shirts from the restaurant are everywhere in southern California. Try to take mine, and you'll end up with a fistful of get-your-filthy-hands-off. Few companies short of Apple (Nasdaq: AAPL ) command similar brand loyalty.
- It's different. Go back to that bit about fresh ingredients. In-N-Out likes to say that it sells "quality you can taste." I'll grant that there's no perfect method for testing such a claim. But on a personal note, I find it instructive and thrilling that my food-allergic son -- who can't ingest protein or most preservatives -- can eat fries from In-N-Out. They aren't loaded with the same junk served by McDonald's (NYSE: MCD ) , Wendy's (NYSE: WEN ) , or Yum! Brands (NYSE: YUM ) .
So what's the difference between In-N-Out, the best company I've ever seen, and the best stock idea I've ever seen? Two things. First, while both are great businesses, In-N-Out isn't public and may never be. Second, my top stock idea is neither family-owned nor early in its development. Mr. Market has merely mispriced its multibagger potential. (Say that five times fast.)
Still, there's something truly special about owning a piece of a business that possesses the intangibles that In-N-Out does:
- Engaged management, preferably via one or more founders with a big ownership stake.
- A proven track record of disciplined growth.
- An insanely loyal customer base.
- A unique angle that allows the business to stand out among its peers.
The Foolish bottom line
Sometimes you'll stumble upon companies that share these traits, as I stumbled across In-N-Out during my teen years in Camarillo. (Mmm, a Double-Double with grilled onions, please.)
Fortunately, you needn't rely on luck. Small-cap firms of In-N-Out's caliber are out there -- and if you're looking for a few ideas, Seth Jayson and Bill Mann search for them daily in our Motley Fool Hidden Gems investing service.
They've hit pay dirt more than once -- yet mispriced opportunities remain. One is a quick-serve specialist that Bill picked for the February 2007 issue. It's even more popular than In-N-Out on Facebook -- and that's saying something, since In-N-Out is ranked fifth among all restaurants there.
What's more, the stock offers an unusual discount to shareholders as a result of an accounting wrinkle. And like In-N-Out, it's self-funded, with engaged owners, and offers a unique dining experience.
And one more personal note: My food-allergic son can eat there, too.
Bill's recommendation is up nearly 50%, but he sees years of high growth remaining. Find out what he's recommending -- and why -- with a 30-day free trial to Hidden Gems.
Fool contributor Tim Beyers didn't own shares in any of the companies mentioned at the time of publication. The Fool owns shares of Starbucks, which, along with Apple, is a Stock Advisor selection. Starbucks is also an Inside Value recommendation. The Motley Fool's disclosure policy will take a chocolate milkshake with its Double-Double, thanks.