Call Traders Circle CAKE Days After Earnings

Cheesecake Factory stock's price may still be too high

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The Cheesecake Factory Incorporated (NASDAQ:CAKE) is an American restaurant and distributor of cheesecakes. CAKE currently owns and operates 301 restaurants throughout the United States and Canada under brands including The Cheesecake Factory, North Italia, and a collection within their Fox Restaurant Concepts business. In addition, CAKE's bakery division operates two facilities that produce cheesecakes and other baked products for their restaurants, international licensees, and third-party bakery customers. At last check, the restaurant giant was trading down 5.6% at $42.61.

Cheesecake Factory stock has increased approximately 85% year-over-year and by 87% since bottoming at a decade low of $22.75, this time last year. Additionally, shares of CAKE have grown by 16% year-to-date. However, Cheesecake Factory stock is down by 35% since reaching its four-year peak of $65.81.

The Cheesecake Factory has outperformed earnings expectations on three of its last four earnings reports. For Q2 and Q3 of 2020, mid-pandemic, Cheesecake Factory dropped into negative earnings territory by managed to outperform estimates by margins of $0.25 and $0.09, respectively. It took until the fourth quarter of 2020 for CAKE to miss estimates while still in negative earnings territory, despite a slightly increased EPS. So far in 2021, Cheesecake Factory returned to positive earnings territory for Q1 of 2021 and simultaneously returned an earnings beat with a margin of $0.26. Wall Street anticipates another jump in earnings per share for CAKE's fiscal second-quarter report, due out in late October.

From a fundamental perspective, Cheesecake Factory stock’s valuation has grown far faster than CAKE has been able to recover from the pandemic’s impact. Cheesecake Factory stock maintains a relatively high forward price-earnings ratio of 22.68. Moreover, CAKE's net income is still down by about $150 million since fiscal 2019. Overall, it is possible that Cheesecake Factory stock will continue to downtrend in order to fix an overcorrection, which could open up an opportunity for long-term investors looking to buy CAKE at a better price.

Shifting gears, short interest has dropped 5.6% during the past two reporting periods. The 5.36 million shares sold short make up 12.5% of the stock's available float, or just over a week's worth of pent-up buying power.

The options pits tell a different story, with a clear preference for calls. At the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 50-day call/put volume ratio of 3.38 sits higher than 92% of readings from the past year. In other words, long calls are getting picked up at a faster-than-usual pace, with the most popular this afternoon the August 40 call.


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