Soaring on Buffalo Wings
Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I have a nasty little investing habit that I am trying to conquer. If I invest in a company and the stock price doubles, then I cash out. I always convince myself that I shouldn’t be greedy and that 100% gains are pretty darn good, and I’m afraid that if some bad news comes out and wipes out my gains and blah blah blah…
I wish that I had a Dolorean equipped with a flux capacitor. American business success stories are too many to count over the past 100 years. If you invested in one of these success stories very early on, you hit a home run investment. Starbucks (NASDAQ: SBUX), Apple (NASDAQ: AAPL), and McDonald's (NYSE: MCD) have all rewarded their investors very well, and have rewarded the investors who were with them in the beginning even better. All the behemoth enterprises found in the market have at least one thing in common: they started off as small, high-growth companies. Investors were rewarded, but they had to stay in to realize their investments full potential.
| Company | IPO Date | Initial Price * | Current Price | Percent Increase |
| Starbucks | June 1992 | $.071 | $48.08 | 7,058% |
| Apple | December 1980 | $2.75 | $636.02 | 17,586% |
| McDonalds | January 1978 | $1.20 | $87.87 | 7,018% |
*Prices adjusted for splits
What a mistake the 100% theory would have been for people who invested early on in these companies. While a double is good and should make any investor happy, there needs to be something of more substance to give you a reason to cash out.
I had a cash out experience in 2008 with Buffalo Wild Wings (NASDAQ: BWLD). I got in somewhere in the $20’s, and cashed out later that year somewhere in the $40’s (I didn’t know I was going to be taxed different). I was pretty satisfied with a double. I was even more satisfied as the market crash took Buffalo Wild Wings down into the low teens. “I knew that would happen” I proudly gloated. "Too bad the rest of the world isn’t as smart as I."
Today, I feel like an idiot. The stock has gone as high as to cross the $90/share mark. I cashed out at 100%. Too bad I left 250% on the table.
Buffalo Wild Today
Oh well, you live and you learn. It’s a bad habit I still haven’t beat, but I’m working on it. There is nothing wrong with cashing out of a stock. The buy and hold strategy doesn’t forbid selling. It just advocates buying for real reasons, and selling for even better reasons.
When Buffalo Wild had its big fall in 2008, it wasn’t completely because the entire market was crashing as well. That was a contributing factor, but BWW had some issues of their own. Gas prices had spiked to all-time highs. Higher gas meant higher food costs, and higher food costs (without a change in menu prices) led to temporarily smaller profits. Wild Wings, like any restaurant stock, is not immune to fluctuation in food prices.
Some companies, like Kraft (NASDAQ: KRFT), have contracts in place to protect them from food price swings. Recently Kraft said “The drought has had an impact on commodity costs everywhere. It’s not likely to impact our costs in the near term, because of our commodity coverage positions.” Buffalo Wild Wings doesn’t have that protection. As quoted from their quarterly report: “We will continue to monitor the cost of chicken wings, as it can significantly change our cost of sales and cash flow from company-owned restaurants…We are currently purchasing chicken wings at market prices.”
The main food that is served at Buffalo Wild Wings is: (drum roll please) chicken wings. It’s safe to say therefore, that as the price of chicken goes, so do the net profits for a restaurant that is chicken based. What has got some investors concerned is this summer’s drought across the country. Currently they are expecting a low corn production which some analysts say will raise the cost of corn up to 25%. Corn is used in chicken feed. If corn goes up, chicken feed goes up. Chicken feed goes up, chicken goes up. That’s not what Buffalo Wild Wings is hoping for.
Strong Growth
The best thing they got going for them right now is the rapid growth they are experiencing. They currently have about 800 locations (company owned and franchised) and believe over 100 will be opened this 2012. That’s a lot of growth. They also foresee this growth continuing for awhile as they work towards have 1,500 restaurants in North America.
They are also in the beginning stages of branching out into new markets: meaning overseas. There is a lot of uncertainty with how successful this will be as buffalo wings are about as American as you can get, and may not appeal to an international pallet. But then again maybe they will. It is untested, so only time will tell.
Conclusion
I feel like even with the uncertainty of rising food costs and interntional restaurant success, this company is a buy. The P/E is reasonable around 24. There may be turbulence in the short term. There almost always is. But you have to like the general direction this company is headed long term. One thing is for sure, I should have stayed in 4 years ago. Those who were smart enough to stay in for the long haul may be rewarded someday with a 1.21 jiga-percent return.
thequast has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Buffalo Wild Wings, McDonald's, and Starbucks. Motley Fool newsletter services recommend Apple, Buffalo Wild Wings, McDonald's, 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.If you have questions about this post or the Fool’s blog network, click here for information.
