Invest in the next McDonald's

By Jon Markman

In a couple of weeks, most Americans will sort through recipes, lay siege to the supermarket, fire up their ovens and prepare to enjoy one of the most gloriously nonsecular, apolitical, communal events on the calendar. That would be Thanksgiving, not the Super Bowl.

What's amazing about this nationwide retreat to the kitchen is just how unusual it is for today's busy families. Three-fifths of Americans eat out every day, and for a remarkable number of families, a local restaurant is the place they take most meals. In fact, many new homes are built these days without any dining room at all, as buyers rank it near the bottom of spaces they consider important in a dwelling.

In about a generation's time, restaurants have become accepted as the third place of American life, after home and office, whether it's Starbucks (SBUX, news, msgs) for breakfast or Applebee's (APPB, news, msgs) for dinner. By the end of this year, industry surveys show that there will be 215,000 full-service restaurants in America and another 250,000 fast-food joints that will collectively generate a stunning $560 billion in sales.

Feeding an American obsession

With so much money pouring into the industry from overworked moms and dads, competition is escalating. Yet it's a tough business in which to make money. Not only is every street strewn with rivals, but raw material and labor costs are beyond your control, marketing expenses are high and government health regulators are relentless and capricious.

This week, in a measure of frustration over the difficulty of achieving consistent profitability, owners of the popular Outback Steakhouse chain, OSI Restaurant Partners (OSI, news, msgs), threw in their dishtowels and sold the company to a private equity fund.

Still, it's as American as deep-fried turkey and pumpkin pie to want to make a buck in the restaurant business. So how can you exploit the American obsession with dining out? I've got three ideas to share with you, so get out your knife, fork and calculator and let's dig in.

First, you need to realize that the big idea in small-restaurant investing is to find some unique dining concept that has proven itself popular and profitable in one region of the country and figure out how it can expand into a national service.

There are not a ton of success stories. The greatest example of all time, of course, is McDonald's (MCD, news, msgs), which started off as a burger stand with outstanding milkshakes in Southern California. If you had bought shares in its initial public offering in 1970, you'd be 18,760% richer today. Shares of Seattle-based coffee specialist Starbucks haven't done too bad, either, with a gain of 5,300% since it started trading in 1991.

After that, the field narrows to a lot of roadside restaurant chains like Cracker Barrel of Tennessee-based CBRL Group (CBRL, news, msgs), up 3,100% since going public in 1984, or Oklahoma-based drive-in Sonic (SONC, news, msgs), up 1,700% since going public in 1991.

The high-end hangout

Which small chains today have the stuff to join this pantheon? One of my top choices, unfortunately, started its public life as a rather large newborn, and that is Chipotle Mexican Grill (CMG, news, msgs). It's unlikely to ever rise 1,000% from its IPO price of $45 in January this year, but it could certainly eventually triple over the next half-dozen years from its current level, around $58.

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