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Option Idea of the Week: Cheesecake Factory

Outperforming CAKE remains plagued by pessimism

by 9/14/2012 11:28 AM
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As contrarians, we like to find fundamentally sound, uptrending stocks surrounded by skepticism, as this often points to sideline cash available to fuel further gains. Fitting that bill is restaurateur The Cheesecake Factory Incorporated (NASDAQ:CAKE - 35.04), which -- despite a quest for multi-year highs -- remains plagued by pessimism on Wall Street.

On the charts, CAKE has tacked on roughly 20% in 2012, ushered higher atop its 10-week and 32-week moving averages. As alluded to earlier, the security has embarked on a quest for new highs, peaking at $35.34 earlier today -- entering territory not charted since April 2006. Furthermore, the stock is now trading north of the $34 region, which halted CAKE's rally attempts on several occasions since late 2010, but could now switch roles to serve as support.

Weekly Chart of CAKE since December 2010 With 10-Week and 32-Week Moving Averages

Regardless of its technical prowess, however, options players remain pessimistically positioned toward CAKE. The stock's Schaeffer's put/call open interest ratio (SOIR) of 1.19 indicates that puts outnumber calls among the front three-months' series of options. Even more telling, this ratio registers in the 74th percentile of its annual range, suggesting short-term options traders are much more put-heavy than usual at the moment. An unwinding of skepticism in the options arena could translate into a contrarian boon for CAKE.

Elsewhere on the Street, short interest still accounts for more than 15% of the stock's total available float, despite depleting by 3.8% during the most recent reporting period. In fact, at the equity's average pace of trading, it would take nearly 17 sessions to buy back all of these bearish bets -- ample fuel for a potential short-covering rally to push CAKE to new heights.

Likewise, CAKE boasts twice as many "hold" or "sell" ratings than "buy" or better endorsements. Plus, the consensus 12-month price target on the shares sits at $34.79 -- a discount to the stock's new high. As the brokerage bunch capitulates to the bulls' club, a wave of upgrades and/or price-target boosts could lure even more buyers to CAKE's bandwagon.

Investors betting on an extended uptrend for CAKE should consider buying the stock's in-the-money January 2013 31-strike call, which was last offered for $4.90.


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