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.