3 Restaurant Stocks That Could Shock Short Sellers After Earnings

Short interest remains elevated on PZZA, RRGB, and CAKE ahead of earnings, despite the stocks' past post-earnings performances

Feb 21, 2017 at 11:23 AM
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Much of the focus this week is on earnings from the retail sector, but a number of restaurant stocks are also on the earnings calendar. According to our internal Sector Scorecard, 88% of the stocks we cover in the "Restaurants" sector are currently trading above their 80-day moving average. Despite this, short interest remains elevated on several names reporting earnings this week. 

Starting with those reporting after tonight's close, short interest accounts for 11% of Papa John's Int'l, Inc.'s (NASDAQ:PZZA) float, which represents more than two weeks' worth of buying power, at the stock's average daily volumes. Meanwhile, bears control 18.5% of Red Robin Gourmet Burgers, Inc.'s (NASDAQ:RRGB) float, which would also take roughly two weeks to cover. Both of these stocks have been strong after earnings in recent quarters. PZZA has gained in the session after earnings in the past four quarters, while RRGB put in post-earnings gains in the two most recent quarters. 

This downbeat outlook is shared by analysts. Not a single analyst recommends buying Papa John's Int'l, Inc. (NASDAQ:PZZA) stock, while only two of six brokerage firms have "buy" ratings on Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB). Keep an eye out for upgrades if the companies again post strong quarterly results. 

Another restaurant stock that's been targeted by short sellers is Cheesecake Factory Inc (NASDAQ:CAKE), with the company scheduled to report earnings tomorrow after the close. Short interest represents nearly 20% of CAKE's float, or 12 days' worth of buying power, at average daily volumes. Like its sector peers, the shares have shown strength after earnings in recent quarters, adding 5.9% and 4.9% in the session after reporting the past two quarters. 

More generally, CAKE has been a strong performer on the charts in recent years, grinding higher since the financial crisis. In the past year alone, Cheesecake Factory Inc (NASDAQ:CAKE) has added 23% to trade at $61.40, touching a record high of $64.41 in early December. Not only could a short-squeeze situation bolster the shares, so too could bullish analyst attention. Ten of 14 covering brokerage firms rate the stock a "hold" or worse. 

One exception to this short-selling craze is Del Frisco's Restaurant Group Inc (NASDAQ:DFRG). Short interest has been falling precipitously on the shares for a year, including a 13.8% drop in the most recent reporting period. There's good reason for bears to back away ahead of the company's quarterly report, too. Looking back, the shares have gained in the session after earnings in five straight quarters. 

On a year-over-year basis, DFRG has added 11.3% to trade at $17.13, and with earnings scheduled for Friday morning, another positive surprise could result in a round of bullish brokerage attention. Specifically, 60% of analysts still rate Del Frisco's Restaurant Group Inc (NASDAQ:DFRG) a tepid "hold." 

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