You’d seen the rationale before: Real wages were dropping, inflation was taking hold and higher fuel prices were wrecking havoc on our budgets.

Because of all of this, one small-cap fast food chain caught my eye: CKE Restaurants Inc. (CKR: NYSE). Depending on where you live, you might know this company by a different name. CKE operates Carl’s Jr. restaurants out West and Hardee’s restaurants predominantly in the Southeast.

My argument for CKE was simple: More and more families will forgo dinner at a casual, sit-down restaurant and switch to fast-food in an effort to balance their budgets. Of course, this wasn’t the only reason I liked CKE.

Here’s a report from the Associated Press: “Same-store sales grew 3.8 percent in August and 3.9 percent in the second quarter, as customers continued to eat at its restaurants despite the high gasoline prices that are eating into consumer discretionary spending.”

On top of this, first-quarter 2006 results showed nice organic growth. Same-store sales increased 5.6 percent at both Carl’s Jr. and Hardee’s company-operated restaurants, compared to the same period the year before.

And in July, CKE announced it had expanded its program to repurchase its stock. The board increased CKE’s repurchase authority by $30,000,000 for a new limit of $50,000,000, according to a company release.

All of this added up to a great six weeks for CKE. Just check out its chart:

As you can see, CKE jumped almost 20% in just six weeks. I still like the stock, but it would be best to sell your shares now for a quick gain. These crazy market conditions have let loose a bunch of irrational bulls, so take your money before the market corrects.

Plus, a quick 20% is nothing to scoff at. And if you’re looking for even bigger gains, keep reading…

Pinnacle Airlines Up More Than 30%

It’s been less than two months since Sleuth columnist and Small-Cap Strategy Report editor James Boric mentioned Pinnacle Airlines (PNCL: NASDAQ) in his August 17 column. In case you don’t remember, Pinnacle is a regional airline company that provides capacity to Northwest Airlines, Inc. The company operates 124 Canadair Regional Jets and serves 118 cities in 37 states and four Canadian provinces.

And when James recommended it, the stock was dirt-cheap. It traded at just 9.6 times earnings, 0.16 times sales and 7 times cash flow. Not only that, but the stock is also owned by Mohnish Pabrai, who runs his own hedge fund, Pabrai Investment Funds. Since 1999, he has averaged a 30% return on his investments.

Just check out Pinnacle’s performance:

Over the last three years, the company has generated over $115 million in cash from operations. It is net income positive in each of the last five years. And it is sitting on $78.2 million in cash — not bad considering the entire company’s market capitalization is only $129.8 million. No wonder the share price has jumped. And it doesn’t hurt that profitable airliners are getting a temporary boost from lower fuel prices.

Picks You Can Trust

Sure, James has written about some great companies here in the Sleuth — but his real gems are found in the pages of Small-Cap Strategy Report. It could be the best place out there to look for under-the-radar small-cap picks.

In fact, James has developed his Small-Cap Strategy Report portfolio to deliver you a possible 30%+ gain every year. 

And as always, stayed tuned to the Sleuth for plenty more great ideas in small-cap investing.

Best,

Greg Guenthner
October 9, 2006

Investing in Fast Food and Small-Cap Airlines was originally featured in the Penny Sleuth.