Some shareholders invest with their hearts. Others invest with their brains. I, on occasion, invest with my gut.
Restaurant stocks will always be a part of my portfolio. I can thank Peter Lynch for that. The legendary investor helped guide the Fidelity Magellan mutual fund to market-thumping returns, largely by buying consumer-facing stocks that he knew well.
"Buy what you know," was his mantra, a message that he hammered home in his best-selling financial books.
Well, who doesn't know restaurants? We know where the crowds are. We see the chains expanding quickly. We know what we like to eat.
Of course, that doesn't mean that you should hand over your life savings after your uncle pitches you on his concept for an eatery that specializes in ice cream sundaes topped with fried clam strips. We can all see Clam Creamery failing from the start.
There's less risk in buying into successful chains that are gaining ground. Here are five that have managed to grow during the market lull, positioning themselves perfectly for when a healthier economy inspires more consumers to eat out more often.
1. Chipotle Mexican Grill (CMG)
Shares of the popular burrito roller closed at an all-time high of $333.71 Tuesday, but they reversed course Wednesday after the company revealed disappointing quarterly results.
Disappointment is relative here, given the market's lofty expectations for the "food with integrity" specialist. After all, when revenue climbs 22% on a 10% surge in sales at the individual store level, it's clear that Chipotle's popularity is only continuing to grow.
Chipotle's shortfall was on the bottom line, as rising food costs, chunky legal bills, and even a hit related to the chain's involvement in the America's Next Great Restaurant show ate into the quick-service eatery's profitability. Chipotle's ultimate profit was $1.59 a share, a mere 9% ahead of last year's showing and a rare miss when stacked against the $1.68 a share analysts were ordering.
Accept the bottom-line slip. All of the factors behind the miss are temporary. The concept's popularity is what will ultimately keep the stock moving higher beyond today's disapproving market reaction.
2. Panera Bread (PNRA)
There's more to a chain's success than just the concept. Chipotle has thrived as other quick-service Mexican brands have faltered. The same can be said for Panera, as its success has come despite weakness at Quizno's, Arby's (WEN), and other sandwich shops.
The key here is that Panera fans would be shocked to see the soup and sandwich bake shop mentioned in the same breath as places cranking out roast beef sandwiches and footlong subs. Panera's appeal is in its freshly baked, high-quality eats.
Analysts see Panera's earnings growing 26% this year and 16% come 2012. Steady expansion and healthy comps should keep sales growing at a double-digit clip, too.
3. Country Style Cooking (CCSC)
Thinking investors have been approaching Yum! Brands (YUM) -- the parent company behind KFC, Pizza Hut, and Taco Bell -- as a conservative play on Chinese consumers. After all, the success of KFC in China is what's really driving Yum! Brands these days.
Despite sliding profitability in its stateside operations, Yum! Brands posted earnings growth in its latest quarter, entirely as the result of its success in China.
Country Style Cooking is a pure play on China, serving up Sichuan specialties at a frenetic pace. The average location turns its tables 16 times a day.
Country Style Cooking went public last fall and traded as high as $36.45 before giving up more than half of its value. Unlike Chipotle and Panera with their recent all-time highs, Country Style Cooking is an intriguing turnaround candidate.
4. Buffalo Wild Wings (BWLD)
Family-friendly sports bars serving signature chicken wings may be a dime a dozen, but Buffalo Wild Wings has perfected the model while executing a brisk expansion plan.
Shares of Buffalo Wild Wings hit a new high Tuesday, and fears that the NFL lockout would eat into the chain's business are easing. Negotiations between players and team owners are nearing an end, and it's now highly unlikely that the NFL will have to shorten its regular season.
5. McDonald's (MCD)
There's more to fast food than cheap burgers and quick drive-through lanes. McDonald's is the world's largest restaurant chain, and its success has come largely from the burger champ's brilliant barbell pricing strategy.
Between its attractively priced dollar menu on one end of the barbell, and premium chicken, salads, and barista-quality beverages on the other, McDonald's has been able to appeal to a wide range of customers and dining budgets. Burger King and Wendy's have tried to keep up, but it hasn't come as easy as it has for the folks behind the golden arches.
So what are you waiting for? Eat up, because it's more than just a gut instinct.
Longtime Motley Fool contributor Rick Munarriz owns shares in Country Style Cooking. The Motley Fool owns shares of Chipotle and Yum! Brands.
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