4 Tasty Stocks for 2007

If' you're a fan of the Lone Star Steakhouse concept, you'll just have to ride off into the sunset alone. The roadhouse-themed casual steakhouse traded for the last time last month, kicking its spurs one final time before being acquired by a private equity firm. The same fate fell upon rival Logan's Roadhouse, and the clock is ticking on Outback Steakhouse parent and Inside Value recommendation OSI Restaurant Partners (NYSE: OSI  ) .

On the more general side of the plate, 2006 brought us several casual-dining chains that opted to repurchase significant chunks of their outstanding shares. Buybacks, even these awkward leveraged buybacks, are generally a good thing, but they ultimately mean fewer eatery shares floating around for purchase.

So do we throw in the napkin and bow out of the fight? No way. Even though this may not feel quite the same as the electric era of the early 1990s, when restaurant stocks -- especially those of casual steakhouses like Outback and Lone Star -- were blazing well-done, there are still plenty of attractive, fast-growing investing opportunities in this sector.

As with any good dining tip, you just need to know where to go and what to order. Let's take a look at four stocks that may fit your diet.

Chipotle Mexican Grill (NYSE: CMG  )
It was one of last year's hottest IPOs, but the shares have cooled off since then, now trading 16% below last May's all-time highs. Have the fundamentals since deteriorated like a poorly rolled burrito? Not a chance. Over the past three months, analyst estimates have been climbing. Wall Street now expects Chipotle to earn $1.23 a share in 2006 and $1.54 a share in 2007. Just three months ago, those numbers stood at $1.07 and $1.31 respectively.

Chipotle has absolutely obliterated profit targets in its first year as a public company. The company has humbled analysts by beating estimates by 45%, 117%, 32%, and 33% through its first four quarters as a public company. Is Chipotle cheap now, trading at a rather lofty 37 times forward earnings? One would think so, but scan back to the earlier part of this paragraph to see how far off the mark Wall Street has been in pegging this success story's true earnings potential.

This isn't a niche play; others in this sector, like Baja Fresh and La Salsa, have been stagnant growers. Chipotle is a standout in Mexican-food quick-service chains, and its shares will reflect that success.

Kona Grill (Nasdaq: KONA  )
I'm a fan of finding restaurant stocks while they're still early in their growth cycle. If you wait too long, expansion has to come at the expense of cannibalizing existing stores; plus, growth rates suffer, since heady expansion is harder with a larger starting base of locations. Right now, Kona seems to fit the bill. It is taking a somewhat eclectic concept upscale, yet it already has signature dishes that you can't find anywhere else, like its macadamia-nut chicken. It also has a high-margin business -- folks will wait for a table at the popular eateries with active alcohol and sushi-bar sales.

Kona is not profitable, and it won't be until later this year, at the earliest. However, it has just 14 locations, trades at a reasonable price-to-sales multiple, and has so much real estate left to conquer.

Brazil Fast Food (Nasdaq: BOBS  )
This was the hottest restaurant stock of 2006, soaring 273% higher. Investors shouldn't expect an encore in 2007, but it's sure to attract some attention, given Brazil's magnetizing stock market and the graduation of Brazil Fast Food out of the penny-stock muck. The company runs the 504-unit Bob's fast-food chain, the second-largest burger chain in its namesake South American country.

Sales rose 25% through the first nine months of 2006, with operating profits and net income soaring even higher. Yes, it's a speculative bet. It's also a risky one, given the geopolitical hiccups that can happen in a developing market. I would feel more comfortable having a Bob's down the block, so I could kick the tires by wolfing down a Big Bob (looks like a Big Mac to me) and washing it down with one of those Ovomaltine milkshakes. Nonetheless, I'll take the healthy sales growth and expansion as a positive sign that the concept is ringing true to the locals.

Texas Roadhouse (Nasdaq: TXRH  )
You don't have to compromise in the roadhouse space just because the pickings are pretty slim after all the private-equity buyouts. Texas Roadhouse would hold up well, even if you weren't biased by the knowledge that private funds are hungry for fresh roadhouse meat.

Sales? They're up 31% through the first three quarters of the year. Expansion is a big part of that, yet comps are up 3.4% so far in 2006, and that's stacked on top of a 6% spurt over the same nine months a year ago. Texas Roadhouse is trading at 25 times forward earnings. That's actually pretty cheap here, since OSI was scooped up at 25 times earnings, while the beleaguered Lone Star chain got bought out at 32 times its bottom-line production.

Hopefully, Texas Roadhouse will be left free to roam, because it has only amassed a quarter of the locations that Outback opened before accepting last year's buyout offer. If not, a juicy premium would still be an acceptable exit strategy.

And speaking of exit strategies, let me pass around some doggie bags so you can take these leftovers home to heat up. Perform some due diligence of your own, and if they still look appetizing, dig in.

For more on these tasty treats, check out:

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Longtime Fool contributor Rick Munarriz has been to several casual steakhouses and regrets that the nearest Texas Roadhouse to his home is a three-hour drive away, while the nearest Kona and Chipotle are about an hour away. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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