Audio Length: 00:14:53

Value investing is always about screening for the lowest P/E or PEG ratios and going from there. Sometimes, the value can be found when there are sell-offs in an industry, which leaves some companies trading below their industry peers.

Tracey has been watching the restaurant group for some time. It was one of the hottest sectors in 2014 and 2015 as nearly a dozen companies when IPO.

Many of those soared but have since come back down to earth. Has that created a buying opportunity?

Even McDonald’s (MCD ) Started Small

Many of the new IPOs are small-cap restaurant brands. They may only have stores in one area of the US. You may not have even eaten at one of these yet.

But there was a time when no one had heard of McDonald’s either. It can take decades for a restaurant brand to expand across the United States and then globally.

There are plenty of smaller restaurant chains whose stock has gotten beaten up in the last few years.

Which have the possibility? And are any deals?

3 Small Cap Chains Which Could Be the Next McDonald’s

1. Habit Restaurants (HABT - Free Report) is a Santa Barbara burger chain with a $566 million market cap and about 172 locations. It’s starting to expand out of its home base of California and will open between 31 and 33 new restaurants this year. Shares are off 52% since the IPO but still trade with a forward P/E of 60.
2. Potbelly Corporation (PBPB - Free Report) is a Chicago-based hot sandwich chain with a market cap of $347 million. It IPO’d in 2013 and shares crashed in 2014. They are still down 55%. But earnings are on the move higher, with 2018 expected to grow 14%. It has a forward P/E of 29.6.
3. Zoe’s Kitchen (ZOES - Free Report) is a Plano-based Mediterranean food chain with 190 locations in 20 states, mostly in the Southeast. It’s in a “hot” food area, focusing on the healthy eating market. Since its 2014 IPO, shares are down 29.3%. It’s finally expected to be profitable in 2017 but is expected to earn just $0.03 a share. That translates into a forward P/E of 516.

These chains are all “young” by industry standards.

There’s no guarantee they can expand successfully outside of their own home markets, of course.

And there’s always things that can happen along the way.

Look at Chipotle (CMG - Free Report). It was the king of the restaurant chains for nearly a decade. Now, it’s still struggling to come back after its food and PR issues.

Is Chipotle worth a look by value investors?