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Why Digging Deeper Matters

Fool colleague Seth Jayson recently waxed lovingly about a real, yet unnamed, company whose mall locations always seem short on foot traffic. Some digging, however, revealed some impressive numbers that led Seth to believe he's found a stock trading at a major discount to intrinsic value. I'm happy for him, but I wish he'd share the tip. (Seriously, dude, I'm not above begging.)

Anyway, forget my bitterness for a second and focus on the lesson: You'd never think this business could produce a potential double at first glance. But you might think just the opposite if you were to visit a Maggiano's Little Italy, a wonderful restaurant concept managed by Brinker International (NYSE: EAT  ) . You'd be wrong in both cases, though.

Maggiano's seems to be always crowded. If you don't call days ahead for reservations, you'll be forced to wait at least an hour for a table when you arrive. And that's if you're lucky. Yet in reporting February sales yesterday, Brinker admitted that growth was slowing and expenses were rising. As a result, the company cut is third-quarter guidance to $0.57 to $0.58 per share before charges. That's down from a February forecast of $0.63 to $0.65.

Ironically, Maggiano's appears to be part of the problem. The chain's February same-store sales growth of 3.9% compares poorly with the 6.3% comps gain it posted a year ago. Of the other Brinker concepts -- including Macaroni Grill, Chili's, and On The Border -- only the Tex-Mex stylings of On The Border boosted comps higher than the previous year's.

The most troubling aspect of all is that Brinker first lowered guidance for all of 2005 last August, then reset expectations in February, and has now reset them again. Any business that consistently fails to meet its own expectations probably has serious problems that will take time to resolve. Sadly, that appears to be the case here, and that's probably why the stock is trading lower by more than 5% as I write this morning. But again, you wouldn't know that if your research amounted to nothing more than lunch in one of Brinker's crowded bistros.

Sure, there are obviously great investments. You can go to the mall, find a killer concept that people are drawn to, invest in it, and make a small fortune. These are rare exceptions, however. More often, investing requires a furrowed brow, an eye for numbers, and the willingness to imagine the worst-case scenario -- and to demand a market-beating return, even under those circumstances. You could call that pessimistic. But I prefer to call it Foolish.

For related Foolishness:

Is Brinker trash or just a dirty gem in need of a polish? And how would you know, anyway? Philip Durell knows. Every month, he turns the market's trash into portfolio cash for subscribers to Motley Fool Inside Value. Take a free 30-day trial today.

Fool contributor Tim Beyers yearns for lunch at Maggiano's. Soon. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in Tim's portfolio by checking his Fool profile. The Motley Fool has a disclosure policy.

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