Investing in what you know and like can be a dangerous concept. It's rooted in a very sound but deceptively simple premise -- that investors do better when they focus upon familiar businesses they understand. Take Peter Lynch's example of how his wife's discovery of L'eggs led to a successful investment in Hanes, now part of Motley Fool Income Investor pick Sara Lee
But there's a critical aspect that many individual investors overlook -- the financials still have to stand on their merits. Although I love Steak 'n Shake
Its second quarter was solid, but not spectacular. Revenue was up over 14% in part because of a 4.3% increase in same-store sales. While that's not a bad number, more than half of that gain came from menu-price increases, and the guest count grew by only 1.2%. Expenses weren't out of line, but the margins did decline a bit, leading net income to grow just under 9% for the quarter. That's not so special when the P/E on the shares is above 18.
So, what's my beef with Steak 'n Shake? I just don't see the kind of growth I'd like to from a company that remains a relatively regional operator (433 stores in 19 states). The second quarter's middling revenue and guest count increases just don't suggest to me that Steak 'n Shake has the sort of gangbusters growth you often see in newer restaurant concepts.
Steak 'n Shake also has to shoulder the common burdens of the brutally competitive and difficult restaurant trade. Many restaurants have debuted with slick shticks, only to sail off into Chapter 11-land when the novelty wore off and diners realized that they were paying premium prices for run-of-the-mill food.
On the other hand, Steak 'n Shake has been around for more than 70 years, so we're not talking about some dumb "here today, gone tomorrow" concept stock. You'd certainly hope that after so long in operation, the company knows how to anticipate and respond to customer tastes.
I hope I'm being too hard on Steak 'n Shake and that what I see as lackluster growth is instead part of management's plan to take a "slow and steady" long-term approach to expansion. After all, I'm nearly addicted to the company's banana split milkshakes, and I hope to continue to enjoy them until at least my third or fourth coronary bypass.
So for now, at least, I'll continue to spend my cash on the food and ice cream and leave the stock for others. Even though this is one case where I might like to invest in something I know, I'm not going to let my stomach overrule my brain just yet.
Dig into more Foolishness about the restaurant world:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).