Analyst Sees Buying Opportunity Amid Papa John's Controversy

Jefferies thinks PZZA stock is now a buy

Aug 1, 2018 at 9:09 AM
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Shares of Papa John's International, Inc. (NASDAQ:PZZA) have continued to fall in the aftermath of the controversy surrounding its fired founder John Schnatter, yesterday hitting a more than three-year low of $40.65. PZZA finally closed at $41.96, meaning it's lost more than one-third of its value in just the past three months. However, one analyst sees this massive sell-off as a chance to buy the stock.

Specifically, Jefferies this morning upgraded the equity to "buy" from "hold" and lifted its price target to $58 from $52, pricing in upside of more than 38% from yesterday's close. While the covering analyst believes fundamentals will certainly take a hit as sentiment surrounding the brand worsens and the next few quarters could be rough, they think this is already priced into the stock. In response, the shares are trading up 3% in pre-market action.

Surprisingly, this seems to be the first analyst update since Schnatter stepped away from the company. It may also be surprising to note that Jefferies' outlook isn't rare on the Street, since the average 12-month price target among PZZA analysts is $58.60.

In the meantime, short sellers have started to cash out amid the stock's epic downfall, with short interest sliding 22.5% in the last two reporting periods. Still, short interest represents more than 21% of Papa John's float.

A number of options traders have seemingly been betting on a rebound, as well. That's according to the security's 10-day call/put volume ratio of 2.11 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Not only does this reading show call buying has more than doubled put buying during the past two weeks, but it ranks in the 71st annual percentile, showing a stronger-than-usual demand for long calls. Of course, some of this call activity could be connected to the elevated short interest levels, with bears picking up options as a hedge.

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