A full 90% of all new restaurants falter in their first year!
That was the gloomy stat dished out by Chef Rocco three summers ago, in his edgy reality television series The Restaurant. The celebrity chef was clearly exaggerating. Most studies still show alarmingly high failure rates -- in the area of 57% to 60% within the first three years -- but the numbers can be misleading.
Upstart eateries can come undone for several reasons. Family issues, poor planning, and a lack of liquidity can cut a promising restaurant's life short. As investors, you can avoid these problems altogether. Most publicly traded eateries are established concepts with seasoned management and several proven locations. Expansion plans provide a clear path for growth. In short, you may never want to open your own restaurant, but you can still get rich by buying into someone else's creation.
Hot and juicy investing
The recipe for success is not a geographical one. The world's three largest burger chains started out in San Bernardino, Calif.; Miami, Fla.; and Columbus, Ohio, respectively. Let's take a closer look at the third one, Wendy's
You didn't have to hop on the Wendy's story just as Dave Thomas was opening the chain he named after his daughter nearly 40 years ago. An investor could have stumbled onto Wendy's a dozen years ago, with the concept already proven and more than 4,000 locations open worldwide, and still made out nicely.
Since 1994, Wendy's has generated 14% in annualized returns. That makes the stock a "hot and juicy" five-bagger over the past 12 years.
Do you think you could have bought into the Wendy's value meal back then? Absolutely. Go back to 1994, and you'll see that the company was already lining up the perfect ingredients for a capital appreciation recipe.
- Thirteen of the company's 18 executive officers had been with the company for five years or more.
- Wendy's was generating positive owner earnings (net income plus depreciation, minus capital expenditures). In other words, the company was funding its ambitious expansion plans with internal cash flows.
- The fiscally sound operator was also using its money to pay down debt and pay a dividend. That's right. The company's high-margin fast food business was throwing off enough cash to fund growth, clean up its balance sheet, and treat its shareholders with quarterly distributions.
If that seems like an isolated case, go up two notches higher to McDonald's
Eating up gains
Peter Lynch never met a restaurant stock he didn't like. Arguably the country's best mutual fund manager, Lynch delivered great gains to shareowners of the Fidelity Magellan fund by buying the companies that fed his inspiration -- and his gut. Lynch's biggest gains weren't cutting-edge technology companies, but firms like Taco Bell and Dunkin' Donuts. He was a satisfied customer, and he ate his way to the bank.
Naturally, the earlier you dig in, the greater the gains. McDonald's has been pretty sweet over the past three years, but if you had bought in three decades ago -- in the summer of 1976 -- you would be sitting on a 50-bagger, adjusted for stock splits and dividends.
There's a reason why Chipotle Mexican Grill
One chain that has won the attention of Motley Fool co-founder Tom Gardner is Buffalo Wild Wings
More than one way to skin a potato
If you'd rather bet on the industry than on one particular concept, one of Tom's biggest winners has been Middleby
Warren Buffett buying Dairy Queen? Peter Lynch leading his fund to higher ground on the back of Taco Bell burritos and Dunkin' Donuts French crullers? Get it right, my friend. We've all got to eat, and there are plenty of quality companies out there ready to serve that need. Isn't your portfolio feeling hungry about now? It's time to rock the Rocco.
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Longtime Fool contributor Rick Munarriz wouldn't mind having a commercial oven in his kitchen. He can get pretty hungry. He does not own shares in any of the companies mentioned in this article. Middleby and Buffalo Wild Wings are Hidden Gems selections.The Fool has a disclosure policy.