Citadel Investment Group, a large hedge fund managed by billionaire Ken Griffin, has reported a position of 960,000 shares in Buffalo Wild Wings (NASDAQ:BWLD). This gives the fund 5.1% of the total shares outstanding. We track 13F filings from hedge funds such as Citadel not only to formulate investment strategies (for example, the most popular small cap stocks among hedge funds outperform the market by 18 percentage points per year on average) but also so we can see how funds trade stocks over time. It turns out that Citadel’s current stake (see more stocks Griffin owned) is up from a little over 250,000 shares at the beginning of January; as a result this is a very large increase which may make Citadel the largest holder of Buffalo Wild Wings out of the hundreds of 13F filers which we track.
Buffalo Wild Wings grew its revenue by 33% last year compared to 2011 (over 90% of revenue came from restaurant sales as opposed to franchise sources). Margins did narrow but earnings did increase at a double-digit rate: 14%. Compound annual growth rates over the last four years were 25% for revenue and 24% for net income, which indicates that growth is not slowing at all on the top line but that the company has been encountering difficulties on the margin front. The fourth quarter of 2012 was strong, with earnings growing 22% versus a year earlier, but the adjusted earnings numbers missed analyst expectations for the third quarter in a row.
Fellow billionaire Steve Cohen’s SAC Capital Advisors had been a major shareholder of Buffalo Wild Wings in the fourth quarter of 2012, according to its own 13F (find Cohen’s favorite stocks). Tiger Consumer Management, a hedge fund managed by Tiger Cub Patrick McCormack, increased its stake in the restaurant by 6% to a total of about 900,000 shares (check out Tiger Consumer Management’s stock picks).
How does Buffalo Wild Wings compare to its peers?
Buffalo Wild Wings is not alone as a high P/E restaurant stock: other growth plays in the industry include Chipotle Mexican Grill, Inc. (NYSE:CMG), Starbucks Corporation (NASDAQ:SBUX), Panera Bread Co (NASDAQ:PNRA), and Dunkin Brands Group Inc (NASDAQ:DNKN). Of these four, Panera is the only one whose trailing earnings multiple is less than 30, at 28. Yet of these four Chipotle is the only one with short interest close to that of Buffalo Wild Wings, and even there the burrito chain- which trades at 38 times trailing earnings and only grew net income by 7% last quarter compared to the fourth quarter of 2011- has only 15% of its outstanding shares short. Starbucks’s recent growth rates are also lower than those at Buffalo Wild Wings, despite the premium in terms of trailing earnings, and Dunkin’s revenue is actually down (though that may be due to franchising or other corporate activity). Panera does have a good growth story going for it, the only one of these peers with both sales and net income growth of 15% or higher in its most recent quarter compared to the same period in the previous year. All five of these stocks made our list of the ten most popular restaurant stocks among hedge funds for the fourth quarter of 2012, with Buffalo Wild Wings at #10 (see more restaurant stocks hedge funds love).
We aren’t particularly excited about Buffalo Wild Wings’ valuation or its performance in comparison to expectations, but it actually seems to be well in line with many other growing restaurants, and possibly a better buy than Starbucks or Chipotle in particular. While it might not be the best long side of a pair trade it certainly seems that Buffalo Wild Wings is overrated as a short candidate.
Disclosure: I own no shares of any stocks mentioned in this article.
