Diners are Trading Down in Order to Continue Dining Out

It is well known that running a restaurant is a tough road to hoe, but that is even more so on the fine dining side of the market during this economic
crisis. Customers tend to be fickle and interested in the next great thing. If you can’t keep a regular base of customers coming in week after week,
you can forget about having longevity.

During the last bull market, there was a trend to go large in the fine dining space. Upscale restaurants that worked in one location were quickly
duplicated in other cities. Once large enough, many of these chains became publicly-traded companies.

Now in the midst of a deep recession, the upscale space is experiencing a huge unwind. In one middle-market city that I visit periodically, there
have been several upscale restaurants that have closed over the last month alone.

Those with ties to public companies are seeing their stocks devalue accordingly. But within that carnage, though, there is a category of restaurants
that is actually doing very well in this environment: The casual dining space. It seems that high-end diners are trading down in order to continue
dining out.

Eating at home has the same drawbacks it has always had for dual-income families — not enough time to shop and prepare dinner. So for them,
and for those that spend time on the road, like me, a casual restaurant is a good option, which is why these stocks are doing well even in the economic
downturn.

Here are five casual dining restaurant stocks that are right in the sweet spot of this soft economy…

NEXT: Restaurant Stock #1

Restaurant Stock #1 – P.F. Chang’s China Bistro (PFCB)

P.F. Chang’s China Bistro (PFCB) has a diverse menu of moderately-priced fare served in a unique
atmosphere that appears upscale. The formula makes P.F. Chang’s a great getaway destination for diners.

Easily duplicated with preparation times than ensure quick turnover of tables allows profits to flow at PFCB. The company’s recent earnings results
are testament to the company’s business model during a challenging economic time.

Shares of PFCB trade above levels reached prior to the credit collapse last fall. I would buy such momentum, as a strong economy is likely to propel
shares even higher.

In my Portfolio Grader stock rating tool, I rate PFCB an A or strong buy.

NEXT: Restaurant Stock #2

Restaurant Stock #2 – BJ’s Restaurants (BJRI)

What better way to unwind from a long day of work than with a burger and a beer at BJ’s Restaurant and Brewhouse?

For less than $10 bucks you can
enjoy dinner and an adult beverage in a comfortable atmosphere that sure beats eating in a hotel room. BJ’s had 82 locations at the end of last year,
and with a proven model of success, plenty of room for growth.

With a solid economy, the growth opportunity for BJ’s Restaurants (BJRI) is impressive, despite
shares now trading for a healthy multiple of trailing earnings.

I would own the stock at current prices, and I rate BJRI an A or strong buy.

NEXT: Restaurant Stock #3

Restaurant Stock #3 – Buffalo Wild Wings (BWLD)

Give the people what they want is a business model to live by, and right now they want wings and sports. And consumers are flocking to Buffalo
Wild Wings (BWLD) for its low-priced menu and sports bar-themed atmosphere.

Prior to the economic recession, BWLD was one of the hottest restaurant names in the market. Higher chicken prices and a weak consumer pressured
shares toward the end of 2008. Since then, the company has recovered nicely, as its fare fit well with a budget-constrained consumer still interested
in a night or afternoon out of the house.

I expect the company to see a big boost in profits going forward from lower chicken prices that have been in place for most of 2009. Without the
hangover of a poor economy, BWLD is easily a $50 stock. You can buy it now for around $34.

I rate BWLD an A or strong buy.

NEXT: Restaurant Stock #4

Restaurant Stock #4 – Chipotle Mexican Grill (CMG)

It is well known that McDonald’s (MCD) is firing on all cylinders. What may not be known is that
McDonald’s well-timed divestiture of Chipotle Mexican Grill (CMG) at prices near $100 per share in
2007 contributed to MCD’s stellar success.

Doing so allowed MCD to focus on its value menu strategy, while funding research and development of the now famous coffee strategy. Was the sale
a vote against Chipotle’s future? Even though shares of CMG plummeted in the wake of the divestiture, MCD’s move had nothing to do with the belief
that CMG would not be a huge success.

The discount in CMG share price ended last fall. Since that time, shares have been rising, as CMG’s own focus on hearty meals in a tortilla or bowl
provided consumers much-needed wallet relief. Instead of the fancy steakhouse, more and more people are enjoying a Chipotle steak burrito.

If you are looking for growth, you have found it in CMG. I would buy the stock that Mickey D’s sold, and I rate CMG a B or buy.

NEXT: Restaurant Stock #5

Restaurant Stock #5 – Ruth’s Chris Steakhouse (RUTH)

I don’t consider Ruth’s Chris Steakhouse (RUTH) to be an upscale, hoity-toity sort of restaurant.
Although Ruth’s provides a great atmosphere and wonderful food and service, the company struggled during the economic boom when upstart fancy steakhouses
offered stiff competition.

Matters got worse for the company during the credit crisis, as the company carries a fair amount of debt on its balance sheet. The combination of
fewer customers and debt load pushed shares of RUTH to bankruptcy levels.

Shares bottomed in March at around a buck a share. A recovery in credit markets and a planned capital raise eased bankruptcy concerns. Coming off
a fourth-quarter loss of more than $60 million, investors were right to be concerned.

Today, the landscape has changed, and much of Ruth’s competition is going by the wayside. With shares at $3.50, Ruth’s valuation is quite low. I
expect growth to return, as the company benefits from less competition and a stronger economy.

I would buy shares here, and I rate RUTH a B or buy.

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