Stock Quotes in this Article: BWLD, CMG, MRT, PFCB, RRGB

MINNEAPOLIS (Stockpickr) -- The
restaurant industry has enjoyed a surge over the last year. As consumers become more emboldened with their budgets, they are venturing out to eat more and more. That spending has resulted in big profits for the group.

If you’ve been to a restaurant lately, you know that some of your favorite joints are filled to the brim. It is more and more difficult to simply walk in a restaurant and be seated immediately. Of course, not all restaurants are created equally. Some are doing better than others.

The same can be said about the stocks of publicly traded restaurants. There have been some big winners over the last two years, including fast food restaurant rising star Chipotle (CMG). Others, such as Morton's (MRT) or Ruths Chris (RUTH), trade way below levels reached prior to the recession.

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    The question for investors is what to do now. The last few weeks of trading have taken the market only slightly higher. Within that time span, there have been multiple sessions during which stocks were significantly lower. Investors can use this period of base-building and consolidation as a chance to review individual positions within the restaurant space.

    Some may be buys, some may be sells, and some may be holds. Here are five names and my assessment of where they go from here.

    Buffalo Wild Wings

    There is no base-building at casual sports bar and restaurant Buffalo Wild Wings (BWLD). After reporting earnings in early February that beat expectations and included a glowing prediction for the future, shares of this fast-growing company are trading higher. At its current price of about $55 per share, the stock is only slightly lower than its yearly high of $57.36.

    This should be no surprise to anyone that has visited a Buffalo Wild Wings location recently. In my local town, the place does very robust business. With its strong same-store sales and strong potential for growth and expansion investors in Buffalo Wild Wings are enjoying a wild ride.

    That wild ride has resulted in a stock that is priced appropriately given future growth expectations. Shares trade for 26 times the company's 2010 earnings per share of $2.10. Analyst estimates for 2011 call for a profit of $2.50 per share, 19% higher than the 2010 number. On a forward basis, investors can buy that 19% earnings growth for 22 times earnings.

    At current prices, this stock is not a buy, but it's not a sell, either. I would hold on from here. If Buffalo Wild Wings does better than 19% growth, shares should continue their ascent. If the company misses the number, shares will likely pull back. The risk for the latter outcome is low given Buffalo’s ability to beat the numbers over the last year. That trend should continue in 2011 based on what I see at the local level.

    Buffalo Wild Wings is one of TheStreet Ratings' top-rated restaurant and hotel stocks, and it showed up on a recent list of 40 value stocks with price momentum.

    P.F. Chang's China Bistro

    Shares of American style Chinese cuisine, P.F. Chang's China Bistro (PFCB) peaked at close to $54 at the end of last year. This year investors have been taking profits, sending the stock to its current price of about $47 per share. With shares up more than double from 2009 lows, the recent selling coincides with the base-building and consolidation taking place market wide.

    Shares of P.F. Chang's got a very short-lived boost after the company reported earnings in mid-February that beat expectations by 7 cents, which was enough to lift the stock for all of one day. Thereafter, shares have continued to drift lower.

    The problem for investors in P.F. Chang's is valuation. The company made $2.02 per share in 2010. Wall Street expects the company to make $2.20 in 2011. That is less than double-digit earnings growth, which is not much for a stock trading at 23 times trailing earnings and 21 times forward earnings.

    The allure for P.F. Chang's bulls is simple: The restaurants are located in highly desirable locations and seem to be filled with customers. Perhaps the dedicated fan base of the company is providing enough support to keep the stock trading well above its growth rate.

    I would be concerned about slower growth in 2011. At a time when the economy is recovering, consumer-based stocks such as P.F. Chang's should be delivering double-digit earnings growth. That is especially true when the valuation is as it now stands.

    I would be a seller of this stock at current prices, and I would not consider buying until the earnings multiple dropped to 10 to 12 times forward earnings.

    P.F. Chang's, which has a current dividend yield of 2.4%, showed up on a recent list of the highest-yielding leisure stocks.

    Morton’s

    The fine dining space was hit hard during the recession. Steakhouses in particular had enjoyed a boom period that resulted in too much capacity in many markets. Here in my hometown, there were several high-end steakhouses catering to what seemed to be insatiable demand.

    The recession changed consumer behavior in a major way. As a result, the steakhouse boom ended with a bust. Many locations needed to be closed to get the market in synch with demand. Stocks of the publicly traded steakhouses, such as Morton's (MRT), collapsed.

    At the peak in 2007, Morton’s was trading for close to $20 per share. Today you can buy the stock for about $6.60. That price is more than double the bottom price of around $3 per share.

    Looking forward Morton’s is expected to make 46 cents per share in 2011. That would represent growth of 48% over 2010 earnings of 31 cents per share. Investors can buy that growth for just 14 times the 2011 estimated profit number.

    Such a valuation is attractive for current investors. Morton’s is a buy at these prices.

    Chipotle Mexican Grill

    One of the hottest stocks in the market at the moment is Chipotle Mexican Grill (CMG). The simple but tasty fast food restaurant has enjoyed explosive growth and great business success. Its stores are highly profitably and easy to duplicate.

    Chipotle has been one of the best-performing initial public offerings in years. Since going public in 2006, the stock has gone up five-fold. Like many, the stock sold off during the recession, but it recovered. At around $250 today, shares now trade well above pre-recessionary highs of $150.

    Fueling those stock gains is impressive earnings growth. Last year, Chipotle generated a profit of $5.64 per share. In 2011, analysts expect the company to make $6.74 per share. With shares trading for $252 per share, Chipotle trades for 45 times trailing earnings and 37 times forward earnings.

    For most companies, this premium valuation would tough to sustain, but not for Chipotle. It would be silly to bet against this company no matter what the valuation. Chipotle keeps delivering the goods and that justifies the price.

    I would not be a buyer at current levels, but I would hold shares. Let the ride continue. The likely outcome is more gains.

    Major holders of Chipotle include Jim Simons' Renaissance Technologies, as of the most-recent quarter. Chipotle showed up on a recent list of 10 food stocks hit by commodity inflation, and it's one of TheStreet Ratings' top-rated restaurant and hotel stocks.

    Red Robin Gourmet Burgers

    It is no coincidence that with a struggling economy, low-priced eateries have attracted the most attention from investors. One such name is Red Robin Gourmet Burgers (RRGB). More than fast food joint, this casual diner was one hot stock in the immediate aftermath of the recessionary lows in early 2009.

    That enthusiasm has waned over the last year. Shares were hit hard beginning in May of 2010 and have yet to hit earlier 2010 highs. The stock received a bit of a boost when it reported earnings in mid-February.

    Those results for the period ended Dec. 31, 2010, beat analyst estimates by 7 cents per share. Shares jumped more than 10% on the news.

    Red Robin produced a profit of 64 cents per share for the full year 2010. Analysts estimate the company will make $1 per share in 2011. If the company meets estimates, that would be a jump of 56%.

    Such metrics justify the current valuation of the stock. Shares trade for 37 times trailing earnings and 24 times forward earnings. That is below the expected earnings growth rate of 56%.

    I would be nervous about that premium if growth stalled in 2012, but that is not the case. Wall Street projects earnings growth of 30% for 2012. I would be a buyer of this growth at current prices.

    To see these stocks in action, check out the 5 Restaurant Stocks to Buy, Sell or Hold portfolio.

    -- Written by Jamie Dlugosch in Minneapolis.

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    At the time of publication, author had no positions in stocks mentioned.

    Jamie Dlugosch is a founder and contributor to MainStreet Investor and MainStreet Accredited Investor. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to The Rational Investor, The Prudent Speculator, Penny Stock Winners and InvestorPlace Media.