Why Potbelly Corp (PBPB) Stock is a Compelling Investment Case

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Artko Capital recently released its Q3 2020 Investor Letter, a copy of which you can download here. The fund posted a return of 22.0% for the quarter, outperforming its benchmark, the S&P 500 Index which returned 8.9% in the same quarter. You should check out Artko Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.

In the said letter, Artko Capital highlighted a few stocks and Potbelly Corp (NASDAQ:PBPB) is one of them. Potbelly Corp (NASDAQ:PBPB) is a restaurant company. Year-to-date, Potbelly Corp (NASDAQ:PBPB) stock lost 9.5% and on November 5th it had a closing price of $3.82. Here is what Artko Capital said:

“Potbelly Corporation (PBPB) – We added a 4% position to the Enhanced Portfolio in the stock of Potbelly Corp at an average price of $3.80. This $80mm market cap company, with a post rationalization, 350 locations of which 95%+ are owned, with one of the more recognizable and valuable restaurant brand namesin the United States. Potbelly is certainly one of the “Covid Orphans” that were left out in the cold by changing nature of the work from home American eater with a pretty significant drop in same store sales and profitability in the first 6 months of the year. However, through adding dinner and pantry menu options, an obvious significant pick up in the delivery business, and a rebound in the economy the company should be back on track to at least company level break even by year end.

What attracted us to this story however is a combination of what one might consider “strategic clues” about the future direction of the company. In the last year, the company has hired a number of top executives, including the former Chief Operating Officer of Wendy’s as CEO and a former Global VP of Strategy at McDonalds as CFO. What those companies have in common with each other and not with Potbelly is that they are mostly franchise-based operations. One of our favorite themes over the last two decades has been a conversion of owned assets into a franchise business model, not unlike our current investment in HireQuest and past investment in Joint Chiropractic. Often times the market misses the optionality of both, the cash inflows from the conversion as well as the high double-digit multiple rerating that franchise operators sport relative to their “ownership” based counterparts. An interesting case analysis of a similarsituation was the Popeyes story ten years ago where even getting rid of a few “ownership” laggards immediately turned the company into a high Return on Invested Capital (ROIC) and Free Cash Flow generating machine. While we do not expect every single location to be sold off to future franchisees, Potbelly is considered a premium brand which can sport high six figure price tags per franchise. A conversion of even one of third of the restaurants would easily cover the entire market cap today.

On the other hand, a decently clean balance sheet, and ownership of said restaurants during a turnaround is more desirable than running a franchise as systemwide decisions can be implemented significantly faster. A spread of the business from a lunch time, people facing operation, to a delivery/pick up and all day based operation is more desirable and should result in significant labor cost efficiencies, and mitigating political minimum wage increased based risk. Ideally we would like to make this a bigger, possibly Core Portfolio type of position, as we see the upside in many multiples of today’s price, regardless whether operations get franchised or continue to be owned, however until the strategic plan is more clear we are comfortable with the current position size and look forward to seeing what the new management team can do with the company.”

Pixabay/Public Domain

In Q1 2020, the number of bullish hedge fund positions on Potbelly Corp (NASDAQ:PBPB) stock decreased by about 36% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t believe in Potbelly’s growth potential. Our calculations showed that Potbelly Corp (NASDAQ:PBPB) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website:

Disclosure: None. This article is originally published at Insider Monkey.