Patient Investors May Find Dish to Their Liking in Zoe's Kitchen

 | Jul 28, 2017 | 12:00 PM EDT
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One thing about the concept of patience as it applies to investing that often is missed is that it goes two ways, both in the buy and the sell decision. Patience most commonly is equated with holding on to a stock for long periods of time, through thick and thin, as a story unfolds (or doesn't). However, it also applies to the purchase decision, especially in distressed situations.

One thing I've learned and re-learned over the years is not to jump too quickly into or immediately take a full position in a name that recently has been punished. As a value investor, I tend to gravitate toward the down and out, the forgotten companies, those that fly under the radar, have been beaten up, or a combination of all the above.

When a name that I've been following gets hammered, the inclination is to jump right in. The difficult part is to determine whether the market is overreacting at that point or whether it's just the beginning of the punishment.

It seems that patience in the buy decision often is most prudent when it comes to busted growth companies. When the growth crowd gives up on a name, it seems to linger longer while adjusting to lowered expectations. At some point, these companies can become attractive to a different type of investor -- namely, the value crowd.

I've followed Zoe's Kitchen (ZOES) , which I believe to be one the freshest concepts in the crowded restaurant space, since it went public in 2014. When Zoe's moved into our town in 2013, ironically occupying Cosi's former space, I had little interest, not being a big fan of Mediterranean food. However, when one of our daughters started working there, I gave it a shot and was greatly impressed. Since then, we've been dozens of times and have never been disappointed.

Great food is in the eye of the beholder, however, and it does not necessarily correlate with investment success.  Indeed, Zoe's has had a wild ride, going public at $15 a share in April 2014 and hitting the $45 range two years ago. A mini-cult stock of sorts, the luster has faded since then, some restaurant stocks have come under pressure, and the growth crowd seemingly has moved on from ZOES.

Disappointing results the past couple quarters have halved shares since February, and they now trade in the mid-$11 range. First-quarter results, released in May, revealed negative 3.3% same-store sales results, which may have been the final nail in the coffin for many investors. While I'm not certain that there has been total capitulation at this point, I finally have initiated a position in the name after watching and waiting for more than three years. It is not a full position, but I've dipped my toe in the water and may build on that stake moving forward; we'll see.

With an enterprise value (EV) of just $362 million and 219 locations, the company's EV/location (yes, another homegrown metric) is just $1.65 million. The company is on track to add 38 to 40 locations in 2017 and has an ultimate goal of 1,600 locations. I don't know if achieving that goal is doable, but I'm willing to see how this plays out. It no doubt will be a bumpy ride, but I am looking out over the next several years and believe Zoe's has a shot at being a big player in casual dining. It's got a lot of work to do, for sure.

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