Peter Lynch taught small investors to seek good investment ideas in the companies behind their favorite everyday products, from cable TV to pantyhose. On vacation in Austin, Texas last month, I may have found the next great Lynch-style idea.

Austin means Tex-Mex, and in even in the hypercompetitive Texas market, Tex-Mex often means Chuy's. This chain of restaurants has grown from eight locations in 2007 to its current 27 restaurants in five states, and last month, it filed to go public. While people outside Texas may not know Chuy's -- except as the place where President George W. Bush's daughters were cited for underage alcohol offenses in 2001 -- it has grown more than 30% annually through the recession. Today, it looks like a red-hot growth company that should definitely go public.

Does it pass the tests?
First off, Chuy's passes Lynch's buy-what-you-know test. In two recent Texas trips, I've driven past a Chuy's dozens of times, and eaten at different outlets at least thrice. Its restaurants are nearly always crowded, the atmosphere is lively, and each looks different enough to avoid feeling exactly like a chain. Chuy's ability to fill Austin eateries is a small mystery, since the city has so much other Tex-Mex that's cheaper and often better. But its $13 average tab delivers a much better product than the old Chi-Chi's chain, and it's less drearily predictable than Darden Restaurants' (NYSE: DRI) Red Lobster or Brinker International's Chili's (NYSE: EAT). Diners will love Chuy's in expansion markets like Tennessee and Indiana.

Chuy's also meets most of Lynch's financial screens. He looked for the following attributes:

  • annual profit growth of 15%-30%
  • low institutional ownership, lest a passing fad attract a too-hefty valuation
  • widening profit margins
  • a light debt load
  • a market cap less than $2 billion

Since 2007, Chuy's has grown sales an average of 31% to reach $94.9 million last year, turned net losses into a $3.3 million profit while tripling operating cash flow to $11.8 million. That's better than Brinker, whose trailing five-year sales growth is negative, or even Darden, which has grown about 7% a year.

Business spiked again at Chuy's in the first quarter, with cash flow quadrupling to $4.3 million. Its $30 million debt load fits Lynch's profile, and with an underwriting syndicate led by Jefferies, it won't be an institutional or media darling.

On the negative side, profit margins narrowed in 2009, and same-store sales growth only reached 0.7% that same year. Both metrics bounced back in early 2010, with margins recovering to nearly their full-year 2009 levels, and comparable-store growth clocking in at 6.7%. Does the fluctuation in those numbers bother me? Perhaps a bit. However, same-store sales growth narrowed to 2.2% even at industry highflier Chipotle (NYSE: CMG) in 2009, before recovering to about 9%. That stock has gone from $42 to $309 since 2006. If Chuy's rebound holds up when it discloses second-quarter numbers, my concerns should fade.

Foolish bottom line
I'd reckon that an IPO will not immediately blow Chuy's valuation sky-high. That's good, if the company can deliver on the common-sense promise of its full restaurants and solid numbers. With no price range set yet, we'll revisit valuation closer to Chuy's deal day. It doesn't even have a ticker symbol yet.

Put it this way: Chuy's is a better place to eat than Chipotle. If it's even half as good an investment, that would just be dessert.

Fool contributor Tim Mullaney doesn't own any of the stocks mentioned. The Motley Fool owns shares of Chipotle Mexican Grill. Motley Fool newsletter services have recommended buying shares of Chipotle Mexican Grill. Motley Fool newsletter services have recommended creating a iron condor position in 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.