(FORTUNE Magazine) – It sounds so easy: If you want to find the next hot stock, look for the local restaurant chain with lines around the block out front or the new store that everyone at work has been talking about.

This approach to stock picking was popularized by Peter Lynch, the chart-topping former manager of the Fidelity Magellan fund, who used it to find terrific companies like Gap and Wal-Mart. But using the so-called Peter Lynch method can also be dangerous, as investors in the formerly hot chains Rainforest Cafe and Planet Hollywood learned to their dismay in recent weeks.

With its jungle decor and mechanical elephants, the Rainforest Cafe charmed parents, young children, and many analysts on Wall Street, who rated the four-year-old company's stock a buy. But when Rainforest warned in early January that earnings and revenue growth for the fourth quarter would come in below expectations because of weak sales and delayed store openings, its stock got defoliated. It fell a whopping 42% in one day and hasn't recovered.

Less than three weeks later, another chain imploded. Planet Hollywood, made famous by celebrity investors like Demi Moore, Bruce Willis, and Arnold Schwarzenegger, has been a box-office flop for most of its brief life as a publicly traded company. But no one expected the kind of fourth quarter Planet Hollywood announced on Jan. 21--it lost $44 million. The company's stock tumbled from more than $10 to just over $7 in a day.

Now analysts, mutual fund managers, and especially the individual investors who visited these chains and then bought stock are feeling surprised and angry. But while investors certainly have a right to be upset, they really shouldn't be surprised. Wall Street is a veritable Boot Hill of failed restaurants, theme chains, and other similar ventures.

Fueled by the faddish success of just a handful of outlets, theme restaurant chains have a history of pursuing breakneck expansion plans. For a while, all the new openings create strong earnings momentum. In most cases, though, customer fascination wears off, repeat business disappears, and market saturation dooms further growth.

That's pretty much the cycle at Planet Hollywood, which opened more than 30 outlets last year. "There was neat stuff on the wall, but the food was bad, and there really wasn't any reason for people to keep coming back," says Paine Webber's Craig Bibb. To make matters worse, as the company saturated major metropolitan areas, new Planet Hollywoods in smaller cities like Indianapolis couldn't generate the kind of volume needed to meet growth expectations.

Rainforest Cafe has only 16 outlets compared with Planet's 87, but it too saw business drop off as the initial excitement about its eco-theme faded and sales of merchandise like caps and T-shirts eroded.

It's been a familiar pattern in recent years. Boston Chicken, the once highflying restaurant chain, plunged from the mid-30s to less than $10 a share in 1997. Sizzler International rose above $20 in the early 1990s, but by 1996 the company was forced into bankruptcy because of sinking sales and a weak California economy.

"If you had followed the Peter Lynch rule of thumb, you might have thought about buying Planet Hollywood and Rainforest," says Bibb. What individual investors don't always realize, he says, is that these kinds of companies "miss earnings estimates and blow up with great regularity. Anybody who's covered this sector for a while has to be pretty cynical about these stocks."

To be fair, Lynch always stresses the importance of in-depth research before buying a stock, and it's just that type of studying that helped him achieve 29% average annual returns at Magellan. But it's hard to blame individual investors for not anticipating the two recent disasters. After all, the Wall Street analysts who follow the stocks for a living nearly all blew it.

Bibb warned his clients away from Planet Hollywood but was still blind-sided by Rainforest Cafe, which he had rated a buy. Top-ranked Salomon Smith Barney analyst Stacy Jamar dropped her buy rating on Planet Hollywood only after its dismal earnings warning.

Some investors might have thought that Bear Stearns analysts Joe Buckley and Dana Telsey would have known something was amiss at Planet Hollywood. Their firm took Planet public, and Bear Stearns investment banker Michael Tarnopol is on the restaurant's board of directors. But the Bear Stearns analysts missed it too. Then there's Steve Rockwell. This BT Alex. Brown analyst has the dubious distinction of having strongly recommended both Boston Chicken and Planet Hollywood--until the shares plunged.

Not surprisingly, analysts are now engaged in a furious bout of finger pointing. While investors say analysts didn't do their homework, analysts complain privately that officials at both Planet Hollywood and Rainforest Cafe misled Wall Street about the extent of their problems. What's more, several class-action suits have been filed against Rainforest, alleging that execs knew business was bad and sold many of their shares before the news came out. Rainforest denies the allegations. For his part, Planet Hollywood CEO Robert Earl insists that the company was honest and open with Wall Street, and adds that in 1998 he is focusing on luring more repeat customers.

For big players on Wall Street, blowups like these are considered the normal, if rather unpleasant, breaks of the game. But individual investors who can less afford such losses might want to rethink the Peter Lynch approach, especially when it comes to restaurant stocks.

"I don't want retail people in these stocks at all," says Jamar, 35. "The problem with the Peter Lynch method is that you have to stay right on top of these companies." You might never know from visiting a Planet Hollywood that business was waning elsewhere or that new stores were not delivering the same punch as earlier ones, says Bibb. Your first inkling of trouble would typically come when the stock cratered.

"I feel bad for retail people who've lost money in restaurant stocks, especially the ones I've been recommending," Jamar says. But she adds that with the exception of McDonald's, every restaurant company she covers has a "high risk" rating. "I hope individuals would have listened to the risk rating because a large number of these stocks have had serious dropoffs."

Why, then, do restaurant stocks keep reaching unsustainable levels? According to Jamar, the seeds of disaster frequently lie in the process of going public. "The investment bankers who say they can raise the most money win the IPO deal, and valuations are pushed up," she explains. So even before the first trade, huge expectations are built into these young companies. And the only way for management to meet those expectations is to open more restaurants.

For investors who get in at the start, the rewards can be enormous. Early investors in stocks like Applebee's and Outback Steakhouse saw their initial investment multiply by five times or more. But eventually the strategy of opening more and more new restaurants falls victim to the law of diminishing returns.

That doesn't mean Rainforest Cafe and Planet Hollywood are destined to follow Sizzler into bankruptcy. Of the two, Rainforest has far brighter prospects, Bibb says, since it's smaller than Planet and still has room to expand. But it's still risky. Another disappointing quarter or a further cut in earnings estimates "would likely banish RAIN to the busted growth stock mortuary," he says.

Planet Hollywood still has its celebrity backers, of course, along with a very strong brand name, especially overseas. But the company has announced it will curtail new restaurant openings, and in the meantime, sales at existing outlets are down. Also, says Jamar, "the jury is still out on whether they can make new concepts like the All-Star Cafe work." A sizable recovery is likely to take several quarters, at the least.

By that time, though, the crowds--and the stock pickers--may well have moved on to the next rising star.