Restaurant Stock Moves Higher on Upgrade

A short squeeze could fuel additional tailwinds for CAKE

Digital Content Manager
Jul 12, 2021 at 10:32 AM
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The shares of Cheesecake Factory Inc (NASDAQ:CAKE) are higher this morning, up 2.8% at $53.08 at last check, after Raymond James upgraded the restaurant concern to "outperform" from "market perform." The analyst in coverage said undervalued full-service restaurant stocks present an attractive entry point for investors, and noted the firm expects a strong second-quarter earnings season for those names. Plus, sales for Cheesecake Factory seem to have accelerated in June, thanks to improvements in both the California and Northeast markets.

As alluded to above, analysts were pessimistic towards CAKE coming into today. Of the 12 in coverage, eight carried a tepid "hold" or worse rating, while the 12-month consensus target price of $61.46 is a 15.8% premium to current levels.

Cheesecake Factory stock has been trending lower since a four-year high of $65.81 on April 29. The security seems to have found a floor at the round $50 level, which roughly coincides with its 160-day moving average. Longer term, CAKE sports a healthy 144.7% year-over-year lead.
A short squeeze could create additional tailwinds for the stock. Short interest rose 14.8% over the last two reporting periods, and the 5.68 million shares now make up a substantial 13.2% of the security's available float. At the stock's average pace of trading, it would take over a week's worth of pent-up buying power.
CAKE's normally quiet options pits have come to life today. So far, over 1,200 calls have exchanged hands, or nine times the intraday average. Most popular by a long shot is the July 55 call, followed by the August 50 put.
These options traders are in luck, as CAKE premiums are affordable at the moment. The stock's Schaeffer's Volatility Index (SVI) of 45% stands in the 14th percentile of readings from the past 12 months. In other words, options players are now pricing in low volatility expectations.

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