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$40 Stock Going to $440

Own it for 1,100% Gains

Written by Briton Ryle
Posted July 6, 2015

In 2006, a small Mexican restaurant chain IPO'd at $45 a share. The stock had been offered at $18, but it launched more than 100% higher on its first day as a public company.

At the time, this chain had 500 stores, and annual revenue had just jumped 32% to around $650 million a year. That's a very strong jump in sales. Investors clearly believed this chain was going to be a winner.

After all, the company had a powerful yet simple formula: serve easily accessible food using quality ingredients at a reasonable price. 

Since that 2006 IPO, the company has grown to 1,600 locations. Its sales have jumped from $650 million a year to $4.5 billion. And the stock price launched from $45 to over $650 a share.

You probably know by now that I'm talking about Chipotle Mexican Grill (NYSE: CMG).

Chipotle shares are up 1,371% since that IPO, making it one of the very best investments you could have made over the last decade. It's right up there with Apple and Netflix.

I've found an up-and-coming restaurant chain that is being completely overlooked by investors. One prominent restaurant analyst said this new restaurant is "one of the best­-in­-history up­-and­-coming restaurant concepts... [its] early-stage momentum and store­-level profitability is even outpacing Chipotle's... early­-stage results."

This restaurant is slated to grow by a factor of 15, pushing its stock price 1,100% higher over the next few years. That's why I've started to call it the "Next Chipotle."

The Hunt for the "Next Chipotle"

Restaurants can certainly make great investments. If a restaurant's concept resonates with diners, growth can be explosive. 

The best example may be McDonald's (NYSE: MCD). It basically invented fast food at a time when Americans were falling in love with cars and cheeseburgers. Perfect. 

It has been one of the great investments over the last 25 years. $100,000 invested in McDonald's in 1990 has turned into over $2.3 million today.

I'm not a fan of McDonald's today — it just doesn't offer enough opportunity for growth. But the example of how much money investors can make in successful restaurants is valid. 

Take restaurant stocks like Starbucks (NASDAQ: SBUX) or Panera Bread (NASDAQ: PNRA). Starbucks shares have launched from a split-adjusted $2 a share to $55 since 1998. Panera has done even better, soaring from $5 to $175 in 15 years. 

Investors are well aware of the outrageous success they can have with restaurant stocks. Gourmet burger joint Shake Shack's (NYSE: SHAK) shares have been up as much as 229% since its recent IPO.

More recently, chicken wing specialist Wingstop (NASDAQ: WING) jumped from an offer price of $19 to $30... on its very first day of trading.

Of course, not every new restaurant stock is a winner... 

How to Pick the Winners

Boston Chicken — now known as Boston Market — ramped nearly 140% on its IPO day in 1993. Investors thought the idea of a restaurant that featured relatively healthy carryout meals for the family was pretty good. 

They were wrong. Boston Market expanded too fast and never really caught on with consumers. Just five years after that hugely successful IPO, Boston Market filed for bankruptcy protection.

It was bought out of bankruptcy court protection by McDonald's two years later.

El Pollo Loco (NASDAQ: LOCO) ran from $18.58 to over $40 in its first six days as a public company. But that promising start isn't look so good now — shares have fallen back to around $21 a share.

And even at that price, the forward price-to-earnings ratio is above 25. That's pretty expensive for a company that won't grow earnings more than 15% next year...

Then there was sandwich shop Potbelly (NASDAQ: PBPB). This Chicago-based chain debuted at ~$32 in October of 2013.

Now, I love the Farm House salad from Potbelly. Topped with bacon, chicken, and blue cheese, it's fantastic. But the chain is not doing well. It's barely profitable and is struggling to grow earnings.

The shares have fallen from $32 to under $12. And the stock may fall even further, as the price-to-earnings ratio is still above 40. 

Noodles & Company (NASDAQ: NDLS) was another one that was supposed to have a lot of potential. This Colorado-based chain has 410 restaurants and did $385 million in sales over the last year. The stock jumped from $32 to $47 early on, but it, too, is failing to live up to expectations. 

Noodles & Company has missed earnings estimates for four quarters in a row. The stock has fallen from $47 to $25. And like Potbelly, its shares look darned expensive, with a price-to-earnings ratio of nearly 70. 

This is the "Next Chipotle"

Now let me fill you on some of the details behind this overlooked, fast-growing company...

The first thing you need to know is how well these restaurants are doing.

Right now, each of this company's 150 locations is averaging $1.5 million in annual sales. That's better than Starbucks, Burger King, and Subway. In fact, at this stage of its growth, Chipotle was doing right around $1.5 million per location, too... 

Next up is the expansion plan.

This "Next Chipotle" company plans to have ~1,500 locations open by 2022 — roughly the same number of stores as Chipotle has now.

If it can simply maintain the average of $1.5 million in annual sales per location, that would mean $2.4 billion in annual sales. That's nearly 1,200% revenue growth.

But the simple fact is, this company is growing its revenue at an industry-beating pace. In its last quarterly earnings report, the average revenue at each location grew nearly 8%! For comparison's sake, same-store sales are growing around 2% at Panera and 10% for Chipotle. 

Finally, there's the valuation. This "Next Chipotle" company is just turning the corner to profitability. So we have to compare how it is trading in relation to its sales. And at 4 times sales (or revenue), this stock is cheaper than Starbucks, Chipotle, Shake Shack, and Wingstop. It trades with a similar valuation to McDonald's, even though McDonald's sales are falling while this company's sales have 10-fold upside. 

Quite frankly, this "Next Chipotle" stock shouldn't be this cheap.

Because if the "Next Chipotle" simply hits its goal of 1,500 restaurants and shows zero same­-store sales growth, a P/S ratio of three (below where it is now) would value the company at $6.75 billion — we're talking 1,110% growth for the stock (from $40 to $440) over the next few years!

The "Next Chipotle" has been flying under the radar. But its most recent earnings report, where it reported that fantastic same-store sales growth of nearly 8%, really got some investors' attention. The stock has run from around $32 to $40 over the last few weeks. In other words, the run to $440 a share has begun. 

Hands down, this is my favorite investment idea right now. And I've got a great presentation for you that fills in more of the details. You can check it out here.

Until next time,

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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