The McDonald’s Alternative for Small-Cap Investors

By George Leong, B.Comm. For Profit Confidential

The restaurant and fast food sectors are fickle, and can easily turn lower without much warning. It happened to burrito maker Chipotle Mexican Grill, Inc. (NYSE/CMG), when it got hammered between April and early October 2012 following its reports of soft results. The stock has since staged a steady rally back to above its previous high in April 2012.

The same thing happened to Ruby Tuesday, Inc. (NYSE/RT), with the stock plummeting around 16% after reporting a soft first quarter that saw continued declines in many key metrics, according to my stock analysis. Ruby could and will likely rally, based on my stock analysis, but it’s not in the same ballpark as Chipotle, so be careful if you are looking to trade the stock.

If you are looking for small-cap growth in the restaurant and fast food sector, you may want to consider a play like Denny’s Corporation (NASDAQ/DENN), as my stock analysis suggests. This sit-in family diner is known for its “Grand Slam” breakfast. The company has superior valuation to its peers, as my stock analysis indicates.

Take a look at the table below, and see how Denny’s sizes up:

The big Wall Street shops focus on the big-name stocks that bring up tons of investment banking and advisory fees. While McDonalds Corporation (NYSE/MCD) is clearly the “Best of Breed” in the restaurant and fast food group, my stock analysis suggests smaller companies, like Denny’s, offer an alternative for investors along with better upside potential; albeit, they’re also riskier. (Read “McDonald’s Proving Position as ‘Best of Breed’ in the Fast Food Sector.”)

Denny’s has gone up 22.47% over the past 52 weeks and has easily outperformed the S&P 500 advance of 15.60% and the 0.99% advance by McDonald’s.

Chart courtesy of www.StockCharts.com

Over the past few years, Denny’s has restructured its operations by selling many of its stores to franchisors, which allows it to simply collect franchise fees while cutting overall costs to operate the stores, based on my stock analysis. According to the company’s web site, about 90% of the 1,690 restaurants in its global network are currently franchised. By changing to this model, Denny’s is now a stronger company, as my stock analysis indicates.

For those interested in Denny’s, my stock analysis suggests that the upside is there, but it could take a while, as the company continues to streamline its operations, play with its menu, and make it more visible to both the investment community and restaurant goers.

My stock analysis indicates that while McDonald’s is the top player in the restaurant and fast foods sector, for some added potential, a restaurant like Denny’s is geared toward the investor looking for a small-cap idea.