Jason Knapp
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Jason Knapp in Special Situation Investing News,

Huge gains can be reaped by finding slow-growing restaurants with fast-growing new concepts

As I get older, and hopefully wiser :), I am putting together a mental list of types of investments that have worked very well in the past. One fairly specific theme that I've seen work several times historically when large slow-growing restaurants spin off smaller, faster-growing subsidiaries.

The ultimate example of this sort of niche investment is when McDonalds (MCD) [yuck] spun off its burrito-making subsidiary Chipotle (CMG) [yum]. Over the next several years, Chipotle went on to become nearly a fifteen bagger, rising 1,483%.

A two-year chart of CMG (blue) vs. the S&P 500 (red)

Another lesser-known more recent example of this theme occurred in 2012 when Carrols Restaurant Group (TAST) a stodgy franchise owner of Burger King restaurants spunoff its faster-growing Hispanic brands Pollo Tropical and Taco Cabana into a new company called Fiesta Restaurant Group (FRGI).

I should have known that this would be a good one. The company has a tree frog in its logo and I love tree frogs!

As an avid follower of special situations, spinoffs being a prominent one, I was well aware of the transaction. Alas, I passed on it for two main reasons. The first is that Burger King sucks. The second is I actually had gone to a Pollo Tropical and found it to be disorganized and the food to not be that great. My mistake was focusing too much on my own personal taste or one subpar experience at a company rather than looking at the outstanding growth and cash flow at Fiesta.

A two-year chart of FRGI (blue) vs. the S&P 500 (red)

After its first day of trading anyone, even non-Carrols shareholders could have purchased shares of Fiesta at $11.50/share. Today, three years later the stock is sitting at $66. To quote Q-Bert "@#$%$%%^%&*!!"

Another example that has been on my radar for a while, but for some reason I never pulled the trigger on is Jack in the Box (JACK). The company was decimated years ago by some incident where I believe bacteria in its burgers made some people seriously ill. I actually like the main franchise's food, but that's not what I really liked about the company. There has been rumors swirling around it for years that JACK might spin off its faster growing subsidiary Qudoba.

That catalyst never really materialized, but it doesn't matter. Since I added it to my CAPS portfolio to keep an eye on it back in March of 2012 the stock has risen 308% versus a gain of 50% by the S&P 500.

A two-year chart of Jack (blue) vs. the S&P 500 (red)

Needless to say, I'm on the prowl for a slower-growing restaurant that has invested in or created a fast-growing interesting new concept. Does anyone out there have any suggestions? I know that Chipotle and Buffalo Wild Wings (BWLD) have a few new irons in the fire. Is there any others?

Thanks for reading, recommending and commenting.