As I was scouring the headlines the past couple of weeks, I came across plenty of articles predicting a small-cap doomsday. This is nothing new — plenty of analysts, columnists, and talking heads try to beat down the idea of small caps every week. They all say the same thing: The run is over; this is the year of the blue chip.

Don’t believe it. Not only do I have it on good authority that these “predictions” some people are making about the market are foolish, I’ve also found a little restaurant chain that is experiencing some explosive growth. This small-cap stock could see huge gains in 2006, while some big casual dining chains continue to struggle… more on this in a minute.

First, let’s take a closer look at the naysayers. As Business Week points out, much of what the big guys are saying is pure nonsense.  

“For the past six years returns on small caps — companies typically worth less than $3 billion — have handily beaten those of large caps. And for much of that time, Wall Street strategists have been predicting that the situation would reverse itself. But the Russell 2000 index of small-cap stocks trounced the large-cap Standard & Poor’s 500-stock index by 19 percentage points in 2003 and eight points in 2004, and eked out a third-of-a point win in 2005.”

So much for dire predictions. The real question is, why is it that small-cap stocks consistently outperform the bigger fish? The answer is obvious: These smaller stocks have more potential to grow.

Forbes.com agrees: “According to researchers at Prudential Equity Group, December-quarter earnings for small and midsized companies should be up 17% or 18%, versus about 15% for large companies. The median company in the Russell 2000 Index of small companies is expected to deliver growth of roughly 18% in per-share profits this year, versus a median of less than 13% for the large companies in S&P 500 Index.”

In other words, if you want to find big growth, think small, like the company mentioned briefly by Business Week’s Aaron Pressman in his article “It’s a Small Cap World After All.” It deserves a spot on your watch list.

That company is Buffalo Wild Wings (BWLD: NASDAQ), a “wing joint,” restaurant, and sports bar rolled together in one building. So they serve more than just wings and beer. The restaurant also has a full menu and is a great place to watch the big game.

If you haven’t heard of Buffalo Wild Wings, you probably will very soon. It’s one of the top 10 fastest-growing restaurant chains in the country. In fact, a BWW (or B-Dubs, if you’re hip) just opened here in suburban Baltimore, and I went to check it out.

I had visited the restaurant several years ago in Virginia, so I thought I knew what I was walking into…but was I ever wrong. Long gone were the small dining areas and overcrowded bar. The new BWW is all about open space, with big-screen and projector TV’s everywhere. The “bar” area is a little less than half the size of the dining area, with more TVs and tables. You can even call ahead and the staff will be sure you have a good view of any of the games they have available on satellite.

And the place was packed. I was worried that the wait would be too long (at a lot of casual dining places out in the suburbs, a weekend wait can be an hour or more around dinner time) but was told that a table would be ready in 10 minutes. It’s hard to complain about that.

Of course, just because you have a good time at a bar and grill isn’t a good enough reason to lay your money on the line. But with a little research, I discovered great growth potential and some solid financials at BWW. Just take a look at some of the highlights from Buffalo Wild Wings fourth quarter earnings report, released in February:

– BWW’s total revenue increased 21.3% over the prior year to $59 million
– Company-owned restaurant sales were up 21.3% over the prior year to $52.3 million
– The company’s fourth quarter same-store sales increased 2.5% at company-owned restaurants and 2.6% at franchised restaurants over the prior year

The third highlight is very telling. Being one of the fastest-growing restaurant chains out there, it’s a given that Buffalo Wild Wings is opening tons of new locations. But the restaurant is also winning new customers at its stores that have been open for a while. It’s hard to argue with results like that…

And this $346 million restaurant chain has some more ambitious plans that are already being put into action this year, including a newly designed menu with four new wing sauces and a year-long partnership with ESPN — what president and CEO Sally Smith calls their “first step into national advertising.”

Not bad for a neighborhood wing joint. With so much going its way, maybe B-Dubs can prove some more people in the blue-chip cheering section wrong.

Until next time,

Gunner

Greg Guenthner

Greg Guenthner uses his experience as a former journalist to dig up the hard-to-find headlines that could lead to big gains for your micro-cap portfolio. Greg offers his readers the scoop on topics ranging from alternative energies to biotechnology, digging up the best penny stock opportunities before they’re discovered by the mainstream media. On top of contributing to Penny Sleuth, Greg also heads Penny Stock Fortunes and Bulletin Board Elite. Special Report: Imagine Getting Rich as Ignored Stocks Soar - You could turn $200 into $1.2 million!

View articles by Greg Guenthner