History Says Don't Buy the Papa John's Bounce

Papa John's last week reportedly hired financial advisors to help stablize the firm

Managing Editor
Aug 27, 2018 at 11:15 AM
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Shares of controversial pizza chain Papa John's International, Inc. (NASDAQ:PZZA) are up 0.7% at $45 in early trading, just days after reports the company has hired financial advisors to help stabilize the chain and repair its public image. Below we will take a look at how PZZA has been faring on the charts, and dive into why now looks to be an ideal time to bet on the stock's next leg lower.

Papa John's stock has been in a channel of lower highs since late 2016, with recent rebound attempts stalling around its 160-day moving average. PZZA stock touched a four-year low of $38.05 on Aug. 8, after the company issued ugly full-year guidance in the wake of racist comments from founder and former CEO John Schnatter. Since then, the shares have attempted a rebound, but a run-up to their 40-day moving average has had bearish implications in the past.

Daily Chart of PZZA With 40MA and 160MA

More specifically, Papa John's shares are now within one standard deviation of their 40-day moving average, after a lengthy stretch below this trendline. There have been 10 similar signals of this kind in the past three years, after which PZZA went on to average a one-month loss of 3.77%, per Schaeffer's Senior Quantitative Analyst Rocky White.

Regardless of its fundamental and technical woes, Papa John's stock has seen a surge in call buying in recent weeks. Per data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), PZZA sports a 10-day call/put volume ratio of 6.01, ranking in the 91st percentile of its annual range. This elevated ratio suggests calls have been purchased over puts at a much faster-than-usual clip.

Echoing this, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.39 ranking in the 11th percentile of its annual range. This indicates that near-term call open interest outweighs put open interest by a wider-than-usual margin right now.

Meanwhile, short interest on Papa John's stock rose a lofty 23% during the most recent reporting period, and now represents more than 26% of the security's total available float. Some of the recent call buying -- particularly at out-of-the-money strikes -- could be attributable to PZZA shorts seeking an options hedge.


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