Let’s face it, people need to eat, and sometimes, yea, we like to treat ourselves and eat something a little above and beyond the normal fare.

Even in recessionary times, consumers can only hold off for so long before they eventually give in to at least SOME of life’s temptations and finer things.

We can see the evidence that speaks to this need at least partially in the restaurant sector as we speak.

Results have been trickling in over the last few months by many different operators and surprisingly, most of the results have not been as bad as feared, or forecast.

As a result, and also because of the timing of the bounce of the recent market bottom, restaurant stocks have soared to the tune of anywhere from 50-200% depending on the company.

So, is this justified? Are we at or near a bottom, and are things turning around?

Personally, I don’t think so, and I feel that these levels and gains are temporarily unsustainable, and we are in for a rude correction sometime soon.

Specifically, I’m going to discuss 4 names that are on my radar screen.

These include: Chiptole Mexican Grill (NASDAQ: CMG) (NASDAQ: CMG.B), Buffalo Wild Wings (NASDAQ: BWLD), BJ’s Restaurants (NASDAQ: BJRI), and Panera Bread Company (NASDAQ: PNRA).

Restaurant Stocks: A Lot of Hot Air

Out of these companies, 3 of the names were on my radar screen late last year, with a formal recommendation of Chipotle at around $45 per share in my Top 5 Stocks for 2009 article.

With Chipotle at or near where I recommended selling shares, I felt it was prudent to take a look at the company before they reported earnings, as well as some other names in this space that I feel are due for some corrective measures.

Chipotle Mexican Grill:

Stock Stuffed to the Brim Like The Chain’s Burritos

Chipotle Mexican Grill owns and operates 830 “fast-casual” Mexican restaurants and offers a focused menu of burritos, tacos, burrito bowls (a burrito without the tortilla) and salads made from fresh, high-quality raw ingredients, prepared using classic cooking methods and served in a distinctive atmosphere.

Chipotle adheres to what they call Food With Integrity (FWI), whereby Chipotle seeks better food not only from using fresh ingredients, but ingredients that are sustainably grown and naturally raised with respect for animals, the land, and the farmers who produce the food.

Chipotle’s ultimate goal is to be able to serve only organically raised and grown food in all their restaurants.

Read more about Chipotle.

Why I liked the stock:

• Stock price was at historically low levels in relative and absolute terms
• Same-store sales growth still positive
• Opening restaurants at a break-neck pace, even in recession
• No debt, strong cash flows, and strong working capital for funding new openings
• New locations become break even in about 3 years or less
• Best in breed company, restaurant and management team
• Continued operational excellence in trying times

Chipotle had some very compelling reasons to purchase shares, at least a small position, way back when I first wrote about the company in my Top 5 Stocks for 2009 article.

Many of those reasons still hold true to this day, including operational excellence, management, etc.

Why I am recommending selling the stock:

• Stock has doubled in a few month’s time from around $40 to $80 per share, while nothing has fundamentally changed within the company, in fact margins have declined and are expected to do so again when CMG reports Wednesday.
• Valuation is higher than any other restaurant company within this space (Trailing P/E: 33, Forward (2009) P/E: 30.6 vs. 15.9 for restaurant industry , P/S 1.91 vs. .4 for restaurant industry, etc.)
• Same-store sales increase was due mainly to increases in prices
• Stock price is significantly higher (45%) than average price target of $55 per share (way higher than any other restaurant I am covering in this article), meaning expectations are going to be extremely high, and even if analyst’s raise their price targets they are unlikely to raise their stock rating, don’t look for any upgrades even on an earnings beat.
• Don’t be greedy.

Bottom Line: Although restaurants are usually a leading indicator in economic recovery, I think that analyst’s and Wall Street is ahead of the game here.

Some of this may be due to short covering and unwinding of long held short positions by institutions in shares of Chipotle, but 25% of the float is still short, so this can’t be all of it.

I would recommend selling at least half to 3/4 of your position before earnings are released, and consider a short position, although I will warn you, CMG’s chart is not favorable right now for a short trade, so I won’t formally recommend that.

Buffalo Wild Wings:

Purveyor of wings has flown too high

Buffalo Wild Wings, Inc., engages in the ownership, operation, and franchising of restaurants in the United States that cater to mainly a sports bar audience serving mainly chicken wings with 14 signature sauces, while providing an atmosphere geared towards watching sports on large screen televisions while enjoying the company of others. The company provides quick casual and casual dining service, as well as serves bottled beers, wines, and liquor.

As of December 28, 2008, the company owned or franchised 560 Buffalo Wild Wings restaurants in 38 states, of which 197 were company-owned and 363 were franchised.

Read more about Buffalo Wild Wings.