Q2 STOCKS TO BUY

Wendy's Co (WEN): An Outperforming, But Underloved Stock

Wendy's Co (WEN) presents a classic bullish contrarian setup for options traders

Dec 30, 2016 at 8:06 AM
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Restaurant stocks like fast-food giant Wendy's Co (NASDAQ:WEN) have been cooking up something special in 2016. Based on our internal Sector Scorecard, the average year-to-date gain among the 19 stocks we cover in this sector is almost 15% -- edging out the broader S&P 500 Index (SPX) by about 5 percentage points. Not to mention, 95% of these names are hovering above their 80-day moving averages -- the highest proportion of any sector.

Yet, restaurant stocks remain underloved as a whole. Only 42% of analysts tracking these shares have handed out a "buy" or better recommendation. This is actually less than the comparable year-over-year figure -- surprising, given the sector's outperformance. Not to mention, on average, each stock has more than 9% of its float sold short, which would translate to more than a week's worth of pent-up buying power, based on average daily volumes.

As alluded to, WEN is representative of the underloved, outperforming restaurant sector. Year-to-date, the stock has soared over 27% to trade at $13.71, and as recently as Dec. 21, it hit a nine-year high of $14.07. In the past three months, the shares have outperformed the SPX by 24 percentage points, as well.

But Wall Street is far from sold on Wendy's stock. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 1.96 puts for each call over the past two weeks -- just 2 percentage points from a 12-month high. While a portion of these put buyers may be shareholders hedging, others are likely speculating on a pullback.

Echoing this put-skew, WEN sports a top-heavy Schaeffer's put/call open interest ratio (SOIR) of 3.87. Not only does this ratio indicate puts nearly quadruple calls within the front three-months' series, it also rests 8 percentage points from an annual peak. Suffice it to say, an unwinding of options skeptics could add fuel to WEN's fire.

Upgrades remain a strong possibility, too. Over two-thirds of covering analysts rate the shares a "hold" or a "strong sell." And while short sellers have been abandoning ship, over 15% of the stock's total float remains dedicated to short interest -- an amount that would take over six sessions to cover, at WEN's average daily trading level.

Any way you slice it, Wendy's Co (NASDAQ:WEN) has the makings of a bullish contrarian play. Perhaps this is why the smart money is upping its stake in the "4 for $4" firm.

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