"Invest in what you know."
-- Peter Lynch
During his 13 year tenure at Fidelity, Peter Lynch earned over 29% annualized returns managing the Magellan Fund. Twenty-five years after his retirement, his words still hold credence. At their core is the idea that working in a certain industry or paying attention to trends in your own life may give you an advantage over Wall Street.
My favorite example of investing in what you know is a story about Motley Fool co-founder Tom Gardner bumping into a motorcycle enthusiast who had a sour taste in his mouth about a $5,000 broker-recommended investment in a Pink Sheets stock. That stock was nearly worthless 10 years later. Meanwhile, over that same time period, an investment in Harley-Davidson would have netted a gain of around $500,000.
As a former restaurant owner and frequent gourmand, I'm a big fan of following restaurant stocks. Before even looking at one financial statement, I like to see if it can execute on a few fundamental principles that will keep customers coming back:
1. Provide good food at a good value.
2. Provide fast and friendly service in a fun setting.
3. Provide a clean and safe environment.
One company that recently showed up on my radar is Texas Roadhouse (NASDAQ: TXRH). A trip to the steakhouse got me interested in digging a little deeper into this company -- let's see how Texas Roadhouse fares when it comes to the fundamentals.
Good food at a good value
Source: Texas Roadhouse
Whether it's five-star dining at an oceanfront restaurant or a trip to the drive-through, diners must feel as if they get what they paid for.
Texas Roadhouse specializes in providing hand-cut steaks at a low, competitive price points. Although steak is the staple, it also offers chicken, seafood, salads, sandwiches, and other standard American fare. A typical entree consists of two side items and unlimited dinner rolls and shelled peanuts. At an average guest check of about $16, the company provides a typically expensive menu item at a very competitive price point.
But is the food good? From my personal experience, I felt I got more than my money's worth. Despite the cheap price, the sirloin wasn't as tough as a two-dollar steak. In fact, it was a tender piece of meat cooked to a perfect medium rare. However, basing an investment on one piece of anecdotal evidence can be dangerous. This is where the online review site Yelp comes in handy.
In an unscientific sample of Yelp reviews from 49 different Texas Roadhouse restaurants (one from each state), the average review was a respectable 3.5 stars out of five. Only two restaurants scored under three stars, while 38 restaurants received either 3.5 or four stars -- not bad for a chain restaurant.
Fast, fun, and friendly service
Employees who will line-dance for their customers for minimum wage must be employees who love their job. Texas Roadhouse restaurants are known for sporting a Southwestern decor, playing upbeat country music, and yes, offering the two-step. Additionally, the preferred disposal method for the free peanut shells is to throw them on the floor.
The lively atmosphere makes Texas Roadhouse a fun place to dine and work. Employees agree, as 78% of the staff on job review site Glassdoor would recommend the company to a friend.
Adding to its ability to provide high-quality service is that most Texas Roadhouse restaurants are only open for dinner during the weekdays. Having a focus on dinner ensures higher quality service, as it allows the staff to prepare and manage just one shift. Management focuses on keeping a low table-to-server ratio that makes guests the top priority. In an industry where inconsistent schedules are an annoyance to employees, a single shift is also something those employees welcome. Additionally, most people don't like to eat in an empty restaurant. Limited hours contract supply and ensure a full house which, in turn, contributes to the fun.
Clean and safe environment
The recent E. coli and norovirus scares at Chipotle Mexican Grill were a stark reminder of the risk of investing in food establishments. Ensuring guest safety should be a top priority for restaurants, and in its most recent 10-K filing, Texas Roadhouse notes the following:
We employ a team of product coaches whose function is to provide continual, hands-on training and education to the kitchen staff in our restaurants for the purpose of reinforcing the uniformity of recipes, food preparation procedures, food safety and sanitation standards, food appearance, freshness and portion size. The team currently consists of over 45 product coaches, supporting substantially all restaurants systemwide.
Additionally, the company performs internal food safety and sanitation audits on each restaurant four times per year. In my personal audit of my hometown location, I noticed bartenders using tongs to put limes in drinks, rather than hands that are dirtied by dollar bills. The ceiling fans and vents were clear of dust, a sign that management has a maintenance checklist. It's small details like these that are a signal that management understands the importance of cleanliness and safety. Again, this evidence is anecdotal, but nonetheless it's a good sign that the company cares about its diners.
Providing customers a quality meal at a quality price, delivering a fun and unique service, and running a tight operation -- this recipe for restaurant success has customers strapping on their boots to find their nearest Texas Roadhouse. The company has enjoyed high single-digit comparable restaurant sales growth for five consecutive quarters, logging about 7% in its most recent report -- those are the kind of results that will have investors screaming "yee-haw"! And next time, we dig into the financial statements to take a closer look at the numbers behind this company.
