NEW YORK (TheStreet) --Papa Murphy's (FRSH) stock has seen hot growth this year, but investors should consider selling before shares cool off.
The Vancouver, Wash.-based pizza chain's expectations for store growth are unrealistic, the company is highly leveraged and some important investors have been cashing out.
Restaurant stocks had a sizzling first half of 2015, and Papa Murphy's led the pack. In June, the stock logged an intraday high of $22.72, giving it a year-to-date gain at the time of more than 95%. The stock has since retreated but is still up more than 70% in 2015.
That type of price gain indicates investors have been betting on a massive surge in revenue growth. But looking at Papa Murphy's business, it's hard to figure out where that growth will come from.
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Papa Murphy's is a franchisor and operator of a chain of "Take 'N' Bake" pizza stores that sell fresh, uncooked gourmet pizzas that consumers buy and then bake at home.
Some observers still describe this as a novel new restaurant strategy, but Papa Murphy's has been in this business for more than 30 years.
In 2014, the company was sued by more than 20 plaintiff groups representing franchisees who alleged that Papa Murphy's misrepresented sales and profitability numbers to them in order to entice them to open franchises. The company has already entered into confidential settlements with some of them, but others have updated and expanded their claims.
Cynthia Hofmann, a Papa Murphy's representative, said: "We believe the lawsuit has no merit whatsoever and we will defend these claims vigorously. We have actively pursued resolutions with the 28 plaintiff groups and of those, 10 plaintiff groups which represent a significant portion of the stores involved in the litigation, have dismissed their claims. We are continuing to work hard to come to an amicable resolution."
The key factor driving the share price to its highs has been the prospect of Chipotle(CMG)-like growth. Unlike Chipotle, however, which consistently shows same-store sales growth in the midteens (on a percentage basis), Papa Murphy's is stuck with growth in the low single digits.
Growth can also come from opening new stores. And the company has said it aims to expand from less than 1,500 stores overall to 4,500 stores in the U.S. alone. (In addition to its U.S. stores, the company has some in Canada and the United Arab Emirates.)