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Restaurant Stocks To Sink Your Teeth Into

In this kind of pullback, home gamers need to find stocks that are down, even though they deserve to go up, Cramer told viewers Tuesday. And the stocks to get in on, he believes, are restaurant names.

“With gasoline prices coming down, I think the estimates for the restaurants are going higher,” he said. While that should send stocks higher, the irrationality of the market has kept everything down. And Cramer believes that has created an opportunity to buy restaurant stocks on the cheap.

That’s why the “Mad Money” host is highlighting restaurant stocks this week. On Tuesday, he focused on mature national names. His contestants: Darden , DineEquity and Brinker . Each company was judged on its ability to turn lagging brands around, and its ability to control costs.

All three companies are turning around, but Cramer believes Darden “takes the cake.” The company, which operates Olive Garden, Red Lobster and LongHorn Steakhouse, is master of rebranding. Right now its focus has been Red Lobster, which saw its same-store sales down 14 to 15 percent in the middle of 2009. Thanks to the company’s remodeling efforts, the seafood chain is now back in positive territory. Darden also successfully remodeled Olive Garden 10 years ago, and the company is almost done revamping LongHorn.

The Orlando, Fla.-based company has also been excellent at controlling costs and has had three consecutive quarters of margin improvement.

“Darden knows what it’s doing, and they’ll be in great shape as people start eating out more now that the price of gasoline is coming down,” Cramer said. It also has the strongest balance sheet of the three, a nice buyback and a healthy dividend that yields 2.6 percent.

DineEquity, which owns Applebee’s and International House of Pancakes, takes second place in Cramer’s book. The company is now focused on turning around Applebee’s, which it bought in 2007. The massive remodeling is working, Cramer said. Last quarter, Applebee’s had its third consecutive quarter of positive same-store sales, up 3.9 percent. However, IHOP is lagging, with same-store sales down 2.7 percent.

DineEquity has the most control over costs of the three contestants. Most of its locations are franchised, and that means the company has a lot of protection from commodity costs.

Brinker, which operates Chili’s and Maggiano’s Little Italy, is in catch-up mode, Cramer said. The company has only just begun a big rebranding of Chili’s and he believes it is too soon to tell whether it will be a success. He believes it has had a huge run, and deserves a rest.

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