This article is part of our Rising Star Portfolios Series.
About a month ago, I bought shares of Red Robin Gourmet Burgers (Nasdaq: RRGB ) for my Special Situations portfolio. Now I'm back for more, allocating an additional $500, or about 3% of the portfolio, to the position, on top of the 5% that I put in last month.
Red Robin still makes an attractive buy for several reasons:
- Red Robin has slowed its expansion and is focused on generating free cash flow.
- Low expectations are built into the stock, and a discounted cash flow analysis suggests shares are at least a little underpriced, and perhaps significantly.
- Activist investors own a huge slug of shares and have purchased more in the past few weeks, auguring the possibility of a buyout.
Stocks such as those of McDonald's (NYSE: MCD ) , Yum! Brands (NYSE: YUM ) , and Chipotle (NYSE: CMG ) have a lot of expectations built into their prices -- and for some good reasons. They've been traditionally good operators and have a lot of international opportunities before them, especially in Asia. But a stock like Red Robin has little expectation holding up its price, so even modest outperformance could significantly lift the stock. And that's the type of low hurdle that I want to find.
So for those reasons, tomorrow I'll be adding to my Rising Star portfolio's position in Red Robin.
RSS Headlines
Fool UK
Comments from our Foolish Readers
Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the
Report this Comment icon found on every comment.
Report this Comment On January 25, 2011, at 7:47 PM, malcarada wrote:
If the CAPS is right on that stock it says there is a P/E ratio of 49.80, looks like a little high to me.
Report this Comment On January 25, 2011, at 8:59 PM, TMFRoyal wrote:
Hi, malcarada,
As I explain in the following article, the P/E is deceptive. In this case, you need to look at EV/EBITDA, which gives a better measure of the cash coming into the business relative to its price. A DCF also may give a better sense of where the stock is priced.
http://www.fool.com/investing/general/2011/01/24/the-next-re...
Jim
Report this Comment On January 26, 2011, at 4:16 PM, nonzerosum wrote:
It does look like good value. Its good that they're paying down debt. They always have a bad current ratio (for years now) so I guess its not a problem maybe CFFO pays the bills?
Add your comment.