Billionaire Ken Griffin’s Citadel Owns 5% of This Restaurant Stock
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Citadel Investment Group, a large hedge fund managed by billionaire Ken Griffin, has reported a position of 960,000 shares in Buffalo Wild Wings (NASDAQ: BWLD). This gives the fund 5.1% of the company's total shares outstanding. We track 13F filings from hedge funds such as Citadel not only to formulate investment strategies (for example, the most popular small cap stocks among hedge funds outperform the market by 18 percentage points per year on average), but also so we can see how funds trade stocks over time. It turns out that Citadel’s current stake (see more stocks Griffin owned) is up from a little over 250,000 shares at the beginning of January; that means this is a very large increase, which may make Citadel the largest holder of Buffalo Wild Wings out of the hundreds of 13F filers that we track.
Buffalo Wild Wings grew its revenue by 33% last year compared to 2011 (over 90% of revenue came from restaurant sales as opposed to franchise sources). Margins did narrow, but earnings increased 14%. Compound annual growth rates over the last four years were 25% for revenue and 24% for net income, which indicates that growth is not slowing at all on the top line, but that the company has been encountering difficulties on the margin front. The fourth quarter of 2012 was strong, with earnings growing 22% versus a year earlier, but the adjusted earnings numbers missed analyst expectations for the third quarter in a row.
This is because the market is pricing in very high growth at Buffalo Wild Wings for the medium-term future. At a market capitalization of $1.6 billion the stock trades at 27 times trailing earnings. Even with good results expected for the next couple years the valuation is 20 times consensus earnings for 2014. So the company could grow at a high rate and still prove overvalued at the current price. A number of market players think that is the case: 23% of Buffalo's outstanding shares are held short.
Fellow billionaire Steve Cohen’s SAC Capital Advisors had been a major shareholder of Buffalo Wild Wings in the fourth quarter of 2012, according to its own 13F (find Cohen's favorite stocks). Tiger Consumer Management, a hedge fund managed by Tiger Cub Patrick McCormack, increased its stake in the restaurant by 6% to a total of about 900,000 shares.
Buffalo Wild Wings is not alone as a high P/E restaurant stock: other growth plays in the industry include Chipotle Mexican Grill (NYSE: CMG), Starbucks (NASDAQ: SBUX), Panera (NASDAQ: PNRA), and Dunkin Brands (NASDAQ: DNKN). Of these four, Panera is the only one whose trailing earnings multiple is below 30, at 28. Yet of these four Chipotle is the only one with short interest close to that of Buffalo Wild Wings, and even there the burrito chain--which trades at 38 times trailing earnings and only grew net income by 7% last quarter compared to the fourth quarter of 2011--has only 15% of its outstanding shares short. Starbucks’s recent growth rates are also lower than those at Buffalo Wild Wings, despite the premium in terms of trailing earnings, and Dunkin’s revenue is actually down (though that may be due to franchising or other corporate activity). Panera does have a good growth story going for it, and is the only one of these peers with both sales and net income growth of 15% or higher in its most recent quarter compared to the same period in the previous year. All five of these stocks made our list of the ten most popular restaurant stocks among hedge funds for the fourth quarter of 2012, with Buffalo Wild Wings at #10.
We aren’t particularly excited about Buffalo Wild Wings’ valuation or its performance in comparison to expectations, but it actually seems to be well in line with many other growing restaurants, and possibly a better buy than Starbucks or Chipotle in particular. While it might not be the best long side of a pair trade, it certainly seems that Buffalo Wild Wings is overrated as a short candidate.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. InsiderMonkey has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings, Chipotle Mexican Grill, Panera Bread, and Starbucks. The Motley Fool owns shares of Buffalo Wild Wings, Chipotle Mexican Grill, Panera Bread, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!