2 Restaurant Stocks that Could Keep the Sector Rally Alive

Domino's Pizza and BJ's Restaurants stocks could be in for additional upside

May 18, 2017 at 11:36 AM
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Restaurant stocks have been hot recently, with Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) yesterday shooting higher on strong earnings, while Shake Shack Inc (NYSE:SHAK) is extending its recent run higher today thanks to bullish analyst attention. Interestingly, the "restaurants" sector is near the top of Schaeffer's Senior Quantitative Analyst Rocky White's Sector Scorecard, meaning this group of stocks has upside potential, from a contrarian standpoint. Below, we'll discuss the skepticism surrounding the restaurant sector, and take a look at two stocks that should be on your trading radar: BJ's Restaurants, Inc. (NASDAQ:BJRI) and Domino's Pizza, Inc. (NYSE:DPZ).

Signs of Pessimism Among Restaurant Stocks

As mentioned above, many restaurant stocks have been making strong moves on the charts, and White notes that two-thirds of the names we cover in the sector are trading above their 80-day moving average. Still, these stocks are heavily shorted, with the median percentage of float sold short coming in at 9.4% -- one of the highest among all the sectors we cover. Plus, the percentage of "buy" ratings among analysts is a lowly 36% -- down from 44% a year ago -- and the average Schaeffer's put/call open interest ratio (SOIR) is an elevated 1.68, signaling a strong preference for puts over calls among near-term options traders. 

BJRI Stock Could Benefit From Upgrades, Short Covering

BJ's Restaurants is one restaurant stock that's been strong on and off the charts, yet has received little respect from Wall Street. BJRI shares have rallied 28% since their 2017 low of $34.60 from Feb. 2 to trade at $44.30. Part of these gains came from an earnings beat at the end of April, which resulted in price-target hikes from Barclays and Wedbush, and sent BJRI to 10-month highs. Despite this, analysts remain very bearish on BJ's Restaurants stock, with the percentage of "buy" ratings from analysts falling from 23% to just 10% over the past year. The door is wide open for upgrades to help the shares higher. 

What's more, BJRI stock has seen rising short interest levels, including a 16.3% jump in the last reporting period alone. Now, 11.5% of its float is devoted to short interest, which equates to one week's worth of buying power, at the security's average daily volume. Short-term options traders also appear bearish, as the stock sports a SOIR of 6.89, which is just 1 percentage point from an annual put-skewed high. An unwinding of all this pessimism could assist BJRI on the charts. 

DPZ Stock Has Even More Upside Potential

Another stock in this sector that could see additional upside is Domino's Pizza, Inc. DPZ stock is no stranger to success on the charts, with the shares enjoying a very strong multi-year uptrend, including a 60% 12-month advance to trade at $193.50, while touching a record high of $198 on May 15, when Tiger Global Management announced that it raised its stake in Domino's. (Not to mention many pizza stocks tend to do well during times of uncertainty, for traders growing antsy about recent stock market events.)

Almost unbelievably, Wall Street remains mostly bearish on the stock. By the numbers, nine of the 12 analysts with coverage on Domino's stock give it just a "hold" rating. Plus, short-term options traders continue to pick up puts over calls, a fact illustrated by DPZ's SOIR of 1.41. And while short interest on the equity fell by 14.4% during the most recent reporting period, a healthy 7.2% of its float is still controlled by these bears. All in all, Domino's Pizza stock could still have room to run, from a contrarian perspective. 


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