10 Small Caps to Rule Them All

Small-cap companies are absolutely one of my favorite areas to research because you can often uncover hidden gems that analysts have neglected or simply not discovered yet. They can offer the ultimate risk-vs.-reward ratio, but also are often not for the faint of heart.

Last week, I detailed my mission to find the 10 small caps to rule them all. For week two of this 10-week series, I'm highlighting casual-dining chain Buffalo Wild Wings (Nasdaq: BWLD  ) .

What it does
Buffalo Wild Wings is an owner, operator, and franchiser of casual-dining restaurants throughout the United States. Since 2005, yearly revenue has tripled from $210 million to $613 million. Profits and shareholder equity haven't skipped a beat either, with each rising annually by double digits.

How it stacks up
Buffalo Wild Wings isn't an inexpensive stock by any means, but as the old saying goes, "you get what you pay for." Some analysts gaze down upon the company's trailing P/E of 26 as too expensive. Personally, I see plenty of value, especially if you look at the other possible choices in the casual-dining sector.

Company

Forward P/E

5-Year Projected Growth Rate

Cash/Debt

Buffalo Wild Wings 21.7 21% $72.1M / 0
BJ's Restaurants (Nasdaq: BJRI  ) 39.0 22% $53.2M / 0
Ruby Tuesday (NYSE: RT  ) 13.5 13% $8.2M / $290.9M
California Pizza Kitchen (Nasdaq: CPKI  ) 22.3 15% $4.8M / 0
DineEquity (NYSE: DIN  ) 13.7 11% $102.3M / $2.0B

You'll notice that BJ's Restaurants sports a higher projected growth rate, but also trades at a forward earnings multiple that's nearly twice that at Buffalo Wild Wings. Ruby Tuesday and DineEquity might seem cheap on an earnings basis if their massive debt piles didn't heavily weigh on investors' stomachs.

Likewise, California Pizza Kitchen may seem like an all-around nice value on paper, but it isn't even currently profitable on a 12-month trailing basis. B-Wild's projected growth rate above 20% compounded with a comparable forward P/E suddenly doesn't look that bad next to its peers.

How it could make you money
Buffalo Wild Wings may want to consider sending Smithfield Foods (NYSE: SFD  ) a gift basket, because Smithfield's quarterly report last week indicated there could be a sharp rise in pork prices. The average American consumes 60 pounds of chicken a year, and as pork prices rise, this figure could go even higher. Luckily for Buffalo Wild Wings, chicken is its main product. Without large gyrations in the price of chicken, Buffalo Wild Wings should not have to raise menu prices, which should in turn help attract and retain customers, improving its recently subdued same-store sales figures.

It has cash -- and lots of it! The company's nearly $4 in per-share cash provides it with the financial flexibility to expand more quickly than its competitors. It's no surprise that it expanded by adding 80 additional restaurants last year, unit growth of 12%. More importantly, the company generated nearly $90 million in cash flow from operations in 2010 and didn't have to resort to diluting shareholders in order to grow. As long as its cash flow remains robust, I wouldn't rule out the possibility of a dividend down the road.

What are your thoughts on Buffalo Wild Wings? Do shares look delectable or are they simply too hot to handle at these prices? Share your thoughts below and consider tracking my 10 small caps to rule them all, as well as your own basket of stocks, with the free and easy-to-use My Watchlist.

Get started by adding Buffalo Wild Wings to your personalized watchlist.

Fool contributor Sean Williams does not own shares in any companies mentioned in this article. He loves BBQ chicken wings, but would like it even more if you would consider making a donation to help out the victims in Japan. You can follow him on CAPS under the screen name TMFUltraLong. Buffalo Wild Wings is a Motley Fool Hidden Gems selection. 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's disclosure policy never wings it.


Read/Post Comments (14) | Recommend This Article (39)

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 Report this Comment icon found on every comment.

  • Report this Comment On March 16, 2011, at 5:03 PM, buffalonate wrote:

    You should have put Chipotle Mexican Grill on your graph also so you could show all the people who love CMG that the growth rates are the same for Buffalo Wild Wings and CMG but CMG's p/e is 45 versus 25 for BWLD.

  • Report this Comment On March 16, 2011, at 6:57 PM, 102971 wrote:

    I bought BWLD in July 2007 at 37.88 a share (based upon a Motley Fool report) and sold them in May 2009 at 39.43. Not the greatest investment of all time. I normally tend to steer away from restaurant stocks (except Yum Brands) and I don't see any compelling reason to buy BWLD at it's current price.

    I'd bet Yum Brands to outperform BWLD over the next two years quite easily..

  • Report this Comment On March 16, 2011, at 7:14 PM, TMFUltraLong wrote:

    Buffalonate,

    I considered adding Chipotle to this article, but they just aren't in the same category of restaurant as Buffalo Wild Wings. But yes, BWLD still looks cheaper.

    TMFUltraLong

  • Report this Comment On March 16, 2011, at 7:46 PM, Bonefish100 wrote:

    Sean, you're late to the party. BWLD has already seen its major runup. I've taken my profits; the P/E is too high.

  • Report this Comment On March 16, 2011, at 7:53 PM, TMFUltraLong wrote:

    Bonefish100,

    The P/E only paints half the picture. Buffalo Wild Wings sports a sub 1 PEG, and is the only company mentioned above that does. The sector averages PEGs well above 1 so as long as it can maintain its growth rate, it should have no problem moving higher.

    TMFUltraLong

  • Report this Comment On March 16, 2011, at 9:37 PM, MichaelHamilton wrote:

    I like eating at buffalo wild wings the food is great but the service could do with some improvement. Perhaps if they took on more of a Hooters type theme they would do more business.

  • Report this Comment On March 16, 2011, at 11:48 PM, skydiver1951 wrote:

    Got my bwld in 2006 and still have them. Like the co. as much now as then. It is my second best pick in caps. The price does dip a bit much at times but it never has been down for veary long.

  • Report this Comment On March 18, 2011, at 11:10 AM, redsncars wrote:

    I too bought in 2006; benefited from stock split; stock is back up to pre-split price; doubled my money. What are the chances of another split to keep the per share price reasonbable for investors?

  • Report this Comment On March 18, 2011, at 12:27 PM, robyrob wrote:

    The ultimate "buy what you know" company. Who doesn't know beer and wings and sports? I'll be putting my $ where my stock purchases are (or something) this weekend for some March Madness.

  • Report this Comment On March 18, 2011, at 7:41 PM, Joemit wrote:

    Bought on a Fool rec, one of the few that has exploded in value

  • Report this Comment On March 25, 2011, at 6:54 PM, donzorco wrote:

    I've been eating at / owning shares of BWLD since I was in college, in 2004. The one thing you folks need to understand about this company is that it's well run. That's why you keep the shares. Would I be a buyer today at 53ish? Maybe I'd start a position just to get in, but it's not the best entry point. Will 5-10$ a share matter 10 years from now? I doubt it.

    This well run company with a rock solid balance sheet is one to keep an eye on, especially with a possible overreaction coming with a pending NFL lockout. Bet against BWLD at your own peril.

  • Report this Comment On March 30, 2011, at 8:01 PM, Seathrun1 wrote:

    Bought BWLD in 2004 so it's an over weight position for me now. I think there's still room for this one to grow so I'm leaving half my shares in the portfolio and have been writing calls against the other half. I might finally get called away in June if it stays over 55

  • Report this Comment On April 20, 2011, at 3:56 PM, Dano442 wrote:

    Bought in 05 and have tripled my initial investment. I see no reason to bail now. They do a great job promoting themselves and they're wings are pretty damn good too. Didn't care for the paper plates and plastic silverware, but this is a college town kind of place. Very appealing to young folks.

  • Report this Comment On April 20, 2011, at 3:56 PM, Dano442 wrote:

    THEIR wings are pretty damn good.

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