More consumers are being lured away from pricier eateries by fast food joints and a bevy of ready-made meals in their local grocers that need nothing more than a quick 20 minutes in the oven. And it's taking a big toll on higher-priced chains such as Cheesecake Factory (NASDAQ: CAKE).

CAKE has seen its fortunes slip along with the economy, and it's been a perfect storm of bad news for some time now.

First it was high food and gasoline prices that initially crushed the stock. Customers began worrying about filling their SUVs instead of dining out. At the same time, high input costs shrank restaurant margins.

With the economy in the toilet, a lot of people are reluctant to go and spend big on restaurant cuisine.

By itself that would be a good reason not to invest in restaurant companies. But restaurant stocks have been absolutely smoked of late, so you have to wonder how much of the bad news is already priced in. Take a look:

• DineEquity (NYSE: DIN), parent company of IHOP and Applbee's: closed on Friday at $11.13, 83% off its 52-week high.
• The Cheesecake Factory (NASDAQ: CAKE): closed Friday at $10.96, 56% off its 52-week high.
• CKE Restaurants (NYSE: CKR), parent company of Carl Jr.'s and Hardee's: closed Friday at $8.88, 47% off its 52-week high.
• Starbucks (NASDAQ: SBUX): closed Friday at $11.08, 59% off its 52-week high.

With very few exceptions, restaurant stocks have been pulvarized of late. It's true that the bad times may last awhile longer but in the grand scheme of things, a few quarters -- or even a few years -- of poor sales and earnings have very little bearing on the creation of long-term shareholder value. That is if a company is well-capitalized and has little leverage.

I think bargain hunters who buy and hold restaurant stocks trading at low price/earnings ratios with very little debt and strong brands will do quite well here.

One stock to avoid: DineEquity, which trashed its balance sheet with the Applebee's acquisition and may have to head back to the market to raise cash at the expense of current shareholders. The Wall Street Journal reports (subscription required) on unprecedented promotions and store closings for some leading chains.

With closings and consolidation, well-managed companies with good balance sheets should come out of this mess OK, and investors who get in at depressed prices should prosper.

Benningan's, the casual dining chain where I had many bad dates, and Steak and Ale, a chain I never visited, have filed for Chapter 7 bankruptcy protection, underscoring how cash-strapped diners are not finding deals like unlimited breadsticks all that tempting.

The two chains, which are owned by billionaire John Kluge, have been in financial hot water for months, according to The Wall Street Journal. The paper reports that the chains were so broke that they did not have enough money to pay their employees for the rest of the week.

"Metromedia Restaurant Group (Kluge's company) earlier this year violated several terms of a lending agreement with GE Capital Solutions," the Journal reports. "It had been in negotiations with lenders for months to stave off the filing, while closing some stores and looking for a buyer, said two people involved in the matter."

Rising labor costs and soaring prices for food are killing casual dining chains. Cheesecake Factory Inc. (NASDAQ: CAKE) recently reported disappointing second quarter results, which featured the biggest drop in same store sales in the dining chain's history. Last year, activist investor Nelson Peltz acquired a 14% interest in the company. Brinker International Inc. (NYSE: EAT), owner of Chilli's Bar and Grill, and IHOP parent DineEquity Inc. (NYSE: DIN) are both down by double digits this year.

There is no hope for a turnaround in these companies anytime soon. Much like diners in these establishments, investors in these stocks are in for a world of indigestion.

MOST NOTEWORTHY: Royal Caribbean, Alkermes and ASML Holdings were today's noteworthy downgrades:

• Morgan Stanley downgraded shares of Royal Caribbean (NYSE: RCL) to Equal Weight from Overweight to reflect margin concerns due to the high oil prices and lowered their target to $37 from $40. However, the firm maintains an Overweight rating on rival Carnival (NYSE: CCL).
  
• Baird downgraded Alkermes (NASDAQ: ALKS) to Neutral from Outperform following the company's reduced Risperdal Consta guidance. The firm does not recommend buying shares.
  
• UBS cut ASML Holdings (NASDAQ: ASML) to Neutral from Buy to reflect order uncertainty heading into 2009.

OTHER DOWNGRADES:

• U.S. Airways (NYSE: LCC) was cut at Credit Suisse to Underperform from Outperform.
  
• Goldman downgraded Cheesecake Factory (NASDAQ: CAKE) to Neutral from Buy.
  
• Nordson (NASDAQ: NDSN) was lowered to Hold from Buy at Jefferies.

MOST NOTEWORTHY: The Restaurant Sector, Blockbuster and Plexus were today's noteworthy upgrades:

• Bear Stearns upgraded the Restaurant Sector to Market Weight from Underweight citing better investor sentiment following Fed rate cuts and the economic stimulus plan; upgraded shares include Brinker International (NYSE: EAT), Cheesecake Factory (NASDAQ: CAKE) and Darden Restaurants (NYSE: DRI).
  
• JP Morgan upgraded shares of Blockbuster (NYSE: BBI) to Overweight from Neutral ahead of the company's Q4 results on March 6, as they believe the quarter will be at least in-line and 2008 guidance will be above Street expectations.
  
• Plexus (NASDAQ: PLXS) was raised to Outperform from Neutral at Credit Suisse as they believe current quarter sales and bookings are tracking ahead.

OTHER UPGRADES:

• Maxwell Technologies (NASDAQ: MXWL) was upgraded to Market Perform from Market Underperform at JMP Securities.
  
• The firm also raised Sotheby's (NYSE: BID) to Market Outperform from Market Perform.
  
• Goldman Sachs added Allianz AG (NYSE: AZ) to its Conviction Buy List.

A fund affiliated with restaurant super-investor Nelson Peltz has acquired a 14% stake in Cheesecake Factory (NASDAQ: CAKE), sending shares of the dining chain up 10% on Wednesday.

The company said that it "has had a preliminary conversation with Triarc (Pelz's firm) already, and looks forward to continuing that dialogue."

According (subscription required) to the Wall Street Journal, "Mr. Peltz has bought stakes in several other restaurant and food companies, including Wendy's International Inc.(NYSE: WEN) and H.J. Heinz Co (NYSE: HNZ). At those companies, he has pressed directors and executives to sell brands, increase marketing or otherwise change their strategies in an effort to raise their stock prices. Mr. Peltz has said he prefers to work with existing management to effect change, though in the past his involvement has prompted reshuffling of company management and boards."

Cheesecake Factory has struggled to provide investors with strong returns over the past few years, and was scraping a multi-year low before the Petlz announcement sent the stock up.

It's a bad sign for restaurants: they're handing out coupons in an effort to lure reticent diners, who are nervous about gas prices, the economy and, of course, housing.

According to the USA Today, Ruby Tuesday is offering $5 off two dinner entrees, IHOP (NYSE: IHP) franchisees are handing out two-for-one coupons, Darden's (NYSE: DRI) Smoky Bones is giving diners $5 off $15 orders, and
T.G.I. Friday's is giving $5 "Bonus Bites" to those who purchase $25 gift cards.

So what's an investor to do? High gas prices and housing woes are most likely to weigh on the minds of middle-class consumers -- a wealthier diner probably isn't going to let his restaurant plans be interrupted by transportation costs.

Cheescake Factory (NASDAQ: CAKE) has seen its share prices slide as traffic growth has slowed. The company has scaled back its expansion plans and is using the extra cash to repurchase stock. Higher dairy prices have affected gross margins but, long-term, there's a lot to like here. The company has a strong brand, lots of room for expansion, and a much higher average check than a lot of the fast casual chains that are struggling.

A mall operator's efforts to prevent the chain from opening in a competitor's location underscores the company's strength: Cheesecake Factory is a destination in a way that lesser chains like Applebee's and Friday's aren't.

A mall developer affiliated with Cheesecake Factory (NASDAQ: CAKE) just got $74 million richer after a jury found that the owner of the Glendale Galleria Mall attempted to block the chain from opening a location in the competing mall. And that's just the beginning.

According to The New York Times, "The Galleria's owner, General Growth Properties, is also facing the prospect of substantial punitive damages because the jury found the company acted with "malice, oppression or fraud" by interfering with negotiations between the restaurant chain and Caruso Affiliated Holdings, the developer of the new shopping center. The punitive damage phase begins on Tuesday."

With the restaurateur's shares languishing near a multi-year low, this could be a good time to look anew at this once-hot growth stock.

The company enjoys phenomenal per-store sales and profitability -- they're nearly always full and the food is pretty expensive -- and currently has around 123 stores. There could be a lot of growth left to be had here. And it all comes at just 20 times earnings.

And the lawsuit also highlights the company's competitive strength: The brand is strong enough that General Growth Properties sought to stop the company from opening a location at a rival's mall. Can you imagine this happening with Applebee's or a similar second-tier chain? This lawsuit shows just how powerful of a draw Cheesecake Factory is.

Cheesecake Factory Inc. (NASDAQ: CAKE) shares are trading higher today after an analyst with SunTrust Robinson Humphrey upgraded CAKE from Neutral to Buy. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on CAKE.

After hitting a one-year high of $29.78 in April, the stock hit a one-year low of 21.45 on Friday. CAKE opened Monday morning at $22.03. So far today, the stock has hit a low of $21.98 and a high of $22.42. As of 11:05, CAKE is trading at $22.27, up $0.61 (2.8%). The chart for CAKE looks bearish and steady, while S&P gives the stock a 3 STARS (out of 5) neutral rating.

For a bullish hedged play on this stock, I would consider a December bull-put credit spread below the $20 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think, but still leverage nice returns. For this particular trade, we will make a 5.3% return in just seven weeks as long as CAKE is above $20 at December expiration. Cheesecake Factory would have to fall by more than 10% before we would start to lose money. Learn more about this type of trade here.

MOST NOTEWORTHY: The restaurant sector, American Semiconductor and First Solar were today's noteworthy initiations:

• Friedman Billings resumed coverage of Cheesecake Factory (NASDAQ: CAKE) and Yum! Brands (NYSE: YUM) with Outperform ratings and a $30 target and a $46 target and Applebee's (NASDAQ: APPB) with a Market Perform rating and $25.50 target.
  
• American Superconductor (NASDAQ: AMSC) was initiated with a Buy rating and $33 target at Jefferies, as they believe repeat orders for wind turbine electrical systems could drive rapid revenue growth from 2008-2010.
  
• CIBC resumed coverage of First Solar (NASDAQ: FSLR) with a Sector Performer rating, as they believe shares are already pricing in the company's 2009 EPS potential.

OTHER INITIATIONS:

• Morgan Stanley resumed coverage of Cablevision (NYSE: CVC) with an Underweight rating.
  
• US Steel (NYSE: X) was initiated with a Sector Performer rating and $117 target at CIBC.
  
• JP Morgan started SunPower (NASDAQ: SPWR) with an Overweight rating and Evergreen Solar (ESLR) with a Neutral rating.

How can a company emerge from bankruptcy and then, just about immediately, start looking for acquisition candidates? Isn't that like heading to The Cheesecake Factory, Incorporated (NASDAQ: CAKE) after the gastric bypass?

And yet Delta Air Lines, Inc. (NYSE: DAL) CEO Richard Anderson says the company is on the prowl. According (subscription required) to The Wall Street Journal, "Activist shareholders have been stirring the pot, too. Pardus Capital management, a big holder of UAL and Delta, is agitating for consolidation behind the scenes, a person familiar with the matter says. Meantime, an Icelandic investment fund has started pressing for change at AMR, which prompted the U.S.'s biggest carrier this week to say it is exploring options, including the splitting off of its frequent-flier business."

In most scenarios, it's a lot better to be the shareholder being bought out than a shareholder in the company doing the buying. This would appear to be no exception. With more labor-friendly forces likely to be taking control in Washington, and no end in sight to soaring gasoline prices, the airline industry is likely to face major challenges going forward.

Mergers and acquisition have a way of making problems worse, not better.

MOST NOTEWORTHY: Countrywide Financial (CFC), Brandywine Realty Trust (BDN), Manhattan Associates (MANH), Spectrum Pharmaceuticals (SPPI) and Amazon.com (AMZN) were today's noteworthy upgrades:

• Keefe Bruyette upgraded shares of Countrywide Financial (NYSE: CFC) to Market Perform from Underperform on valuation.

• Brandywine Realty Trust (NYSE: BDN) was upgraded at Wachovia to Market Perform from Underperform based on pipeline progress and valuation.

• JP Morgan upgraded Manhattan Associates (NASDAQ: MANH) to Neutral from Underweight following better-than-expected Q2 results.

• Spectrum Pharmaceuticals (NASDAQ: SPPI) was upgraded to Hold from Sell at Brean Murry, expecting shares to remain stable into the spected Phase III initiation with Ozarelix coming in Q4.

• Amazon.com (NASDAQ: AMZN) was upgraded by a host of companies following the strong quarter and margin growth, including JP Morgan, which upgraded shares to Neutral from Underperform. Bear Stearns upgraded shares to Peer Perform from Underperform, Lehman upgraded shares to Equal Weight from Underweight and Credit Suisse upgraded shares to Outperform from Neutral...

OTHER UPGRADES:

• Merrill upgraded United Parcel Service (NYSE: UPS) to Buy from Neutral.

• Goldman added AT&T (NYSE: T) to its Conviction Buy List.

• Raymond James raised Cheesecake Factory (NASDAQ: CAKE) to Strong Buy from Outperform.

• Kaufman upgraded Plantronics (NYSE: PLT) to Hold from Sell.

• Matrix USA upgraded Expedia (NASDAQ: EXPE) to Hold from Sell.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

As Jonathan Berr reported minutes ago, Cheesecake Factory (NASDAQ: CAKE) is among the tens of names to travel into the earnings confessional after today's closing bell. The company announced second-quarter profit of $23.7 million, or 33 cents per share, up from year-ago results of $23.4 million (30 cents per share). Revenue jumped 16% higher during the period to $373.2 million, and same-restaurant sales were up 1.1%.

Both of the key figures - per-share earnings and revenue - were higher than analysts' respective estimates of 31 cents and $372 million.

During the three-month period, the company opened two new locations and is on track to open 21 new restaurants by the end of 2007.