The 2-Minute Thought Looking for Stocks Like Pepper Food Service

 Source: Nikkei Asian Review

Source: Nikkei Asian Review

Do you know Pepper Food Service?  It’s a Japanese company that runs steak restaurant chains.  If you haven’t heard of it, you’d be far from alone.  But you may wish you had because its stock is up more than 800% since January of this year.  At one point in late October, it was actually up 1200%, though it since has fallen off those highs.  Still, the stock has a chance of ending this year as the best performing stock in Japan’s Topix index.

Pepper Food Service runs a number of reasonably priced do-it-yourself steak restaurant chains where your meat comes out on a sizzling heated iron dish that’s been patented.  Among its chains are Pepper Lunch, which offers quick, low-priced steaks and hamburgers, and the very popular new concept called Ikinari Steak Restaurant, which is famous for making its customers stand while eating.  People order steak by the gram, get a cut of quality meat that’s been wet-aged for 40 days, and after it arrives on a sizzling iron platter with sides and sauces, eat while standing at high tables.  No chairs make for fast turnover.  People get in and out of there fast.

The company’s founder, Kunio Ichinose, has been running restaurants since 1970 and developed the special iron plate that allows customers to cook their steaks as desired at their tables.  He opened the first stand-up steakhouse in Tokyo in 2013 to do two things: 1) serve a high-quality cut of steak at half the normal price and 2) feed as many people as possible as quickly as possible. 

According to The Financial Times, “Everything is calculated for speed of throughput and optimal use of limited ground floor spaces in key city locations.  The height of the tables, Mr. Ichinose demonstrates by jumping up and miming, has been calibrated so that diners are unlikely to put their knives and forks down between mouthfuls.” 

The restaurants have been a hit.  In Tokyo, people can wait for 45 minutes to get in during the week – but then stay for less than 30 minutes.  A tiny 200-square foot restaurant can serve 500 people a day.

The company already has expanded to Manhattan, where it plans to open 20 restaurants over the next five years, and it’s been a hit with New Yorkers too.  There’s something, it seems, about quality food, a $20 steak, and standing up to eat it (though the restaurant did recently announce it had caved in and decided to add limited seating to some of its New York restaurants). 

But do all those lines outside the restaurant translate into an 800% rise in the stock?  What has happened to the stock is a bit of a mystery.  It’s true that the right concept that strikes the right chord with customers can be rewarding.  But the stock looks to be trading at 90 times stated trailing earnings.  And after doing hardly anything for a decade, it’s surprising that the stock took off like a rocket just this year.

The lesson, if there is any, is that being in luck’s path is quite nice.  This is a small-cap stock with a market cap of about $900 million.  That means it was a $100 million stock at the beginning of this year, and no one at all cared about it then.  Not a single sell-side analyst covered Pepper Food Service. 

So perhaps the other lesson is that one way to get into luck’s path is to look where no one else is looking – at the stocks that get ignored.  The Financial Times reported that 42% of the companies in Japan’s Topix get no analyst coverage at all.  That compares quite favorably with the 5.7% of companies in the S&P 1500 Composite that are covered by just two analysts or fewer.