Don't take a bite of Nathan's Famous

This highly speculative microcap stock is good for indigestion but not much else.

By InvestorPlace Jul 3, 2014 2:01PM

Credit: © Russell Kord/Alamy

Caption: Nathan's Famous restaurant stand on Coney Island in New York

By Dan Burrows


The Nathan's Famous (NATH) Fourth of July hot dog eating contest is a brilliant exercise in brand building, and one of America's favorite holiday spectacles.


But it still doesn't make Nathan's stock worth a bite.


Nathan's Famous -- that all-American purveyor of Nathan's hot dogs and crinkle-cut fries -- has become something of an under-the-radar Wall Street darling during this bull market.


During a period when even the bigger burger chains have struggled, the stock has been crushing the Standard & Poor's 500 Index ($INX).


Indeed, since the bull run began in early 2009, Nathan's stock is up 367 percent on a price basis. The broader market rose 189 percent over the same period. Meanwhile, McDonald's (MCD), the big kahuna of fast-food restaurants, is lagging along with a 94 percent rise in share price.


Of course, Nathan's Famous is much more than a restaurant company.

Heck, the franchises aren't even the most important driver of the business -- or the stock. The biggest contributors to sales are Nathan's branded products group and its licensing operation.


The branded products business is what allows you to buy Nathan's Famous hot dogs at, say, the local ballpark. Meanwhile, you can find Nathan's Famous hot dogs for sale in more than 30,000 supermarkets across the country because the company licenses the manufacture of those products for a royalty fee.


At this point in its development, Nathan's Famous figures that the products and licensing businesses have built up the brand enough that they should be able to leverage it into growing the franchise base.


Sure, it sounds compelling -- but then, so does every strategic plan. And it hardly makes the stock a suitable investment for most retail investors. Here's why:


Nathan's Famous speculative stock

When it comes to Nathan's Famous, we're talking about a company with a market value of about $240 million -- a thinly traded microcap with a price that bounces around like one.


Furthermore, there's virtually no analyst or media coverage on the stock, making it nearly impossible for retail investors to get a sense of Nathan's Famous growth prospects.


Unless you happen to be a client of the one analyst covering the stock surveyed by Thomson Reuters, you're going to have to do your own discounted cash flow analyses, come up with your own earnings estimates and set your own price targets.


Forward price-to-earnings multiples, long-term growth rates? You're on your own.


NATH stock is a highly speculative bet. That alone should dissuade you from this gamble. But you should also consider this: Nathan's Famous is trying to grow in a fast-food and fast-casual restaurant landscape that is rewarding names serving fresher, healthier food, like Chipotle Mexican Grill (CMG).


Are hot dogs and fries really in tune with the times?


Bottom line

By all means, stuff yourself with Nathan's hot dogs this holiday weekend. Watch the Nathan's Hot Dog Eating Contest.


But as far as the stock goes, it's good for indigestion, and probably not much else.


More from InvestorPlace

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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