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Nathan’s Famous, Inc. (NATH), Red Robin Gourmet Burgers, Inc. (RRGB), Inc., Del Frisco’s Restaurant Group, Inc (DFRG): 3 Small Cap Restaurants With Great Potential

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Small cap stocks are generally defined as stocks that have a market cap between $250 million to $1-$2 billion, although this range varies on your source. Nevertheless, small-cap stocks have two key advantages for the individual investor. First, there is a large opportunity to beat institutional investors like mutual funds. This is because mutual funds have restrictions that limit them from buying large portions of any one issuer’s outstanding shares. Also, the very nature of the goal of mutual funds – consistent, predictable, non-volatile returns – make small caps off limits for the most part. Second, small cap stocks have the growth potential that large cap stocks don’t have. The following companies are 3 small cap restaurants with great long-term potential.

Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB)

Nathan’s Famous, Inc. (NASDAQ:NATH)

When it comes to hot dogs, no brand is more famous than Nathan’s Famous, Inc. (NASDAQ:NATH). The company is generally ignored in the flooded restaurant sector based on their low coverage and average daily volume, but the stock has slowly provided outstanding returns over the past decade. Its share price has gone up over 1300% the past 10 years and nearly 50% this year alone. With a P/E of nearly 33, the market has high expectations for Nathan’s Famous, Inc. (NASDAQ:NATH) in the coming years, and in my opinion it has earned that premium.

Nathan’s Famous, Inc. (NASDAQ:NATH) has just 308 units across 27 states and 8 countries, with retail distribution across all 50 states in over 32,000 supermarkets. Profit margins are in the top 20 for the restaurant industry and 75th percentile of all traded stocks in the US. Net income for 2012 FY was $6.16 million vs. $2.2 million in the 2011 fiscal year. 3rd quarter 2013 FY earnings shows that net income is up another 16.5% to $5.913 million, with revenue increasing 9.2% to $56.6 million. This is a huge positive because net income is rising faster than revenue, showing that business efficiency is improving.

Other positives for the company include its ability to overcome Hurricane Sandy last October, which forced the closing of all company-owned restaurants, including its famous Coney Island location. That location re-opened this past Memorial Day weekend, and this should help push its 4th quarter sales higher and make 2013 FY a new record for net income. The potential Chinese takeover of Smithfield Foods, Inc. (NYSE:SFD) by Shuanghui International could also be a plus for Nathan’s Famous, Inc. (NASDAQ:NATH). Nathan’s Famous, Inc. (NASDAQ:NATH) is currently in a business agreement with John Morrell & Co., which is a Smithfield Foods, Inc. (NYSE:SFD) subsidiary, that promises Nathan’s to be an exclusive licensee to manufacture and sell branded hot dog, sausage, and corned beef products at retail. The potential for Nathan’s to penetrate the Chinese market while also seeing 12% growth in their Branded Product Program may push Nathan’s to much higher share prices.

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