Perhaps predictably, Chipotle's (NYSE:CMG) meteoric rise to success has given rise to a number of other fast casual restaurants hoping to see similar results. Shake Shack (NYSE:SHAK), Potbelly (NASDAQ:PBPB), El Pollo Loco (NASDAQ:LOCO) and others may have what it takes on the menu, but will their numbers give investors indigestion?

Tune in to this consumer goods edition of Industry Focus to find out not only how some of the individual contenders are doing post-IPO, but whether fast casual stocks as a whole are getting into bubble territory.

A full transcript follows the video.

Sean O'Reilly: It's almost lunchtime, so we're talking about fast casual restaurants on this consumer good edition of Industry Focus.

[INTRO]

Greetings Fools, I am Sean O'Reilly, with the one and only Vincent Shen, and we are joining you from Fool Headquarters in Alexandria, Virginia. How are you doing today, Vince?

Vincent Shen: I'm doing well. How are you, Sean?

O'Reilly: Not too bad. Do you think this is a continuation of our sin stock series?

Shen: Informally, because some of the restaurants in fast casual -- like Shake Shack, I would say -- do not exactly contribute to the overall health of the nation.

O'Reilly: If you ate there a lot, your cholesterol probably would go up.

Shen: Yes, exactly.

O'Reilly: If you're just joining us, we are talking about fast casual stocks, and more specifically, are they entering a bubble phase? If you've been paying attention to the stock market the last few years, Chipotle has continued on its miraculous ascent to be the next McDonald's (NYSE:MCD) or something along those lines, and it has invited a ton of imitators.

You've got the Shake Shack IPO, you've got Potbelly, you've got Zoës Kitchen (NYSE:ZOES); all these companies are going public, and as we shall soon see, they kind of pale in comparison -- financially at least -- their food is great, though!

Shen: Yes!

O'Reilly: First and foremost, Investopedia lists a "bubble" as 1, 2, or 3. We're going to focus on the 2 or 3.

"An economic cycle characterized by rapid expansion followed by a contraction." We're waiting for that, but it's happened to a couple of these stocks.

"A surge in equity prices, often more than warranted by the fundamentals and usually in a particular sector," which is exactly what's happening.

And 3, "A theory that security prices rise above their true value and will continue to do so until prices go into freefall and the bubble bursts."

Vince, where do you think we are with that?

Shen: I would say the second part of that is pretty apt, for some of these companies at least.

O'Reilly: Yes. Why are all these companies jumping in, having their IPOs and everything? What makes Chipotle so great that they're trying to get a piece of this?

Shen: I think that Chipotle started a bit of a revolution in the industry, for restaurants.

O'Reilly: Ironically enough, they used to be owned by McDonald's!

Shen: Exactly. People, especially consumers, are just seeing the possibility of getting quick service like they're used to at a fast food restaurant, but also quality food.

O'Reilly: Locally sourced, if it can be done.

Shen: Exactly. Better quality ingredients, healthier options in some cases. As a result, in the past two years we've seen all these new companies going public, and they're all jumping in on the coattails.

O'Reilly: The growth that Chipotle has seen ... I obviously was preparing for this show here. You know, I'm an analyst here at the Fool in the consumer goods and technology sector, and I obviously know Chipotle and how awesome it is, but every time I look at it I'm amazed at the money and the growth that this company's throwing out there. It's up what, 30-fold, its share price, since its IPO in 2004 or 2006 or something?

Shen: Yes, 2006. Even at the IPO then, people were pretty bullish on it. It priced at $22 above the range. Despite that, I don't think people quite expected it to do what it has done, because the stock trades at ...

O'Reilly: Even if you had bought after it doubled, the day of the IPO, you'd be up like 1,400% over the last eight years.

Shen: Exactly.

O'Reilly: The S&P's up 60%!

Shen: It's pretty phenomenal.

O'Reilly: The return on equity from 2009 to 2014 has averaged 23.1%, and since the depths of the financial crisis -- when it kept growing, no problem -- earnings per share have grown from $4.00 to $14.35, which is 29% annually. This is an exceptional company.

Shen: Exactly.

O'Reilly: And it looks like they're about to open up another 200 locations. They've got 1,700 open now. They're still going.

Shen: Overall, something to mention with that though is that they're still a U.S. business, primarily. They only have a handful of locations ...

O'Reilly: I think there's like one in Paris or something. I can't remember exactly. Nobody quote me here!

Shen: Yes, they have a handful in France. There's one in Germany, a few up north in Canada, but overall it's definitely a U.S. company still.

O'Reilly: How do they compare to the former parent, McDonald's?

Shen: Well, 1,800 locations is impressive, especially with how quickly they've come about. But let's keep in mind that McDonald's has 14,500 U.S. locations, and worldwide they are about 36,000 locations.

O'Reilly: That's kind of a lot.

Shen: It also gives you an idea of the opportunity, so don't look at Chipotle's location numbers now and think that they're starting to top out.

O'Reilly: Yes, got it.

We've had a number of IPOs -- and this is what we alluded to before -- but in the last two years you had, by my count, at least five fast casual restaurants have their IPOs, really ramp up their growth and everything. El Pollo Loco, Potbelly, Shake Shack just recently, Zoës Kitchen, Noodles & Company (NASDAQ:NDLS).

How are these guys doing, financially? I've eaten at all of these, they're great food ... except for Shake Shack. Sorry, I misspoke. We'll get them into the District here soon, and I'll go to one.

But investors, they're not getting as well-treated as Chipotle shareholders.

Shen: Well, it depends on how you look at it because, like I said, people are really hot on fast casuals right now. All these IPOs either priced at the top of or above the range.

O'Reilly: And then they doubled that day, usually. Something like that.

Shen: Exactly. Let's see, El Pollo Loco is ...

O'Reilly: Pretty much break-even.

Shen: Well, it's up 60% from the IPO pricing.

O'Reilly: The pricing.

Shen: And it's up 20% year to date, so Pollo Loco.

Shake Shack, which only went public in late January or so -- what, about six weeks ago?

O'Reilly: Right.

Shen: They've already more than doubled their price from the offering. But then you also have ...

O'Reilly: If only I could get in on these IPOs before they ...!

Shen: Yes, that's very difficult to do unless you're one of the bigger institutional guys.

But there have been a few stragglers, or a few companies that have lagged the industry. Potbelly and Noodles & Company more recently, with their latest earnings release, really took a dive. They fell I think over 30% after they released earnings in late February.

O'Reilly: Yes, Potbelly's down 58% from October 2013, when they had their IPO. They of course had their offering, but then then the stock price went up that day. But had you bought that day you'd probably be down, I don't know, about 60%. Then something similar with Noodles & Company.

How are these companies doing, profitability wise? Obviously, Chipotle is minting money. Their average location makes $250,000, and they've got 1,800 locations.

Shen: Exactly. A trend that you'll see for these fast casuals is their growth comes from opening new locations, growing their comps. Potbelly has been struggling in that regard. Their comps growth has been very low -- low single digits for the past five years, really.

O'Reilly: They finally broke into the profit category this past year, as I understand it.

Shen: Exactly. That's definitely been a struggle for them.

Noodles & Company has about 440 restaurants, so definitely not on the scale of Chipotle quite yet, but they too have been taking a hit. They had to reduce their guidance, and that really hurt them with their recent share price performance.

O'Reilly: What kind of profitability ... I was going down the line here, and one of the big things for me is return on equity, because I'm just very focused on what the company is doing with the shareholders' money. Over the long term, return on equity will eventually start to show up in earnings growth and share price growth and everything -- and they pale here, too.

About 10% for El Pollo Loco, Potbelly's 2.8%, Shake Shack is 4-5%. That's kind of iffy, because obviously different locations and different time periods and everything, because of the IPO and everything. But they made $4.5 million last year and they've got about $200 million in shareholders' equity, so just obviously a back of the envelope thing there. A negative number for Zoës, and Noodles is about 8.6%.

The average S&P 500 corporation makes 10-12, so this is not exceptional numbers by any stretch of the imagination.

Shen: Yes, and Shake Shack in particular. I know you have your feelings on this as well. They have a little over 60 locations, and their market cap is about $500 million.

O'Reilly: Better be the best gosh-darn burger in the world!

Shen: People are very, very optimistic about the company. Their plans, they want to open at least 10 restaurants per year. We'll see, obviously, how things play out.

O'Reilly: That's kind of restricting yourself to 20% growth, though. Unless your comps go gangbusters ...

Shen: Well, they say "at least." But even their comps currently, it's hard to compare because they've only had maybe five restaurants open for more than two years.

O'Reilly: Right.

Shen: So doing some of those comparisons can be different, and they acknowledge that some of their growth numbers for these stores are going to fluctuate significantly as a result of that.

O'Reilly: It seems to me ... clearly, there was a place in the market of United States restaurants for a higher quality burger chain. I don't think anybody's disputing that.

But the trick with Chipotle was it was so unique and we'd never seen anything like that before; these burritos in the bowls, you get your rice, you get your steak ... you can go nuts. I can get a burger anywhere in America. Every restaurant has a burger.

Shen: Yes. On the flipside, though, the burger category is the largest category for restaurants.

O'Reilly: So there is a big opportunity there.

Shen: Yes. It is the largest category for that particular item.

O'Reilly: The burrito category isn't as big!

Shen: It's burgers, and then pizza -- and burger is about two times the size of pizza.

O'Reilly: Got it.

Shen: So there is an opportunity there but you're right, it's extremely competitive in that space. There's plenty of players, be it some of the newer -- like Shake Shack, like Smashburger -- these fast casuals. But then also you have your long-standing McDonald's, Burger Kings ...

O'Reilly: Right.

We were a little bit young, but we obviously learned about it in school, the dot-com bubble and the housing bubble, and all that stuff. Do you think this whole fast casual thing is entering bubble phase? Where do you think we are?

Shen: I think that especially some of these newer IPOs have set some pretty high expectations with the financial industry and for investors in general.

As a result, you're going to see instances like Noodles & Company, where if they hit a rough patch and their guidance comes in weak, their earnings reports come in weak, then it's going to have these major, major moves of 30% or more because people have bid them up so much already.

O'Reilly: For sure. It's not like the Internet or housing -- this grand mass delusion, where 300 million Americans are all trying to get in on something.

It's much smaller than that, but I just found it very highly suspicious when Shake Shack had their IPO a month and a half ago and they priced themselves at the exact same price to sales multiple as Chipotle, which was like 7.1 or something. I was like, "Who are you people kidding?"

Shen: I agree. It's very, very optimistic.

O'Reilly: Oh, well! All right, so do you want to go to Chipotle?

Shen: Yes.

O'Reilly: Awesome! Very good, well thanks for sharing your thoughts, Vince.

Shen: Thank you, Sean.

O'Reilly: Have a great day. I'll go get the car keys and we'll go to Chipotle.

Shen: All right!

O'Reilly: That's it for us, Fools. Before we go, I wanted to make our listeners aware of a special offer available to all Industry Focus listeners, for a subscription to Motley Fool's top-performing Stock Advisor newsletter. Head over to focus.fool.com to learn more about the special offer.

As always, people on this program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Thanks for listening, and Fool on! 

Sean O'Reilly has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, McDonald's, and Zoe's Kitchen. The Motley Fool owns shares of Chipotle Mexican Grill. 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 has a disclosure policy.