With the recession bearing down hard on the American consumer, frugality is fast becoming ingrained on Main Street. But, as evidenced by recent activity in the fast-food sector, no longer is "fast and cheap" the deciding factor in where consumers spend their money. In fact, companies such as McDonald's Corp. and Burger King Holdings, Inc. are struggling in their attempts to make headway, while more specialized restaurants such as Panera Bread Company are soaring.
It's this apparent shift toward more bang for your buck that is apparently impacting McDonald's Corp.'s (MCD) bottom line. After topping analysts' expectations for nearly the past 2 years, MCD's first-quarter results for fiscal 2009 were merely in line. Meanwhile, revenue for the quarter fell short of Wall Street's views. The shares quickly shed nearly 3% following the report, sending MCD down for a retest of support at its 10-week moving average. The stock market is now trading below former support at the 55 level, and staring up at staunch resistance at its declining 20-week moving average - a trendline that MCD has not closed a week above since mid-January. A breach of near-term support at its 10-week moving average could perpetuate the best stock's pattern of lower highs that began in August 2008.
Sentiment toward this underperforming security is surprisingly optimistic. The Schaeffer's put/call open interest ratio (SOIR), which compares put open interest to call open interest among options that expire in fewer than 3 months, has dropped from 0.81 following April options expiration to its current perch of 0.77. This decrease comes as call open interest has increased at a faster pace than put open interest. Furthermore, the current reading ranks below 90% of all those taken in the past year, underscoring the elevated bullish sentiment from this speculative crowd.
What's more, call activity on the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) has been brisk. During the past 10 trading sessions, an average of 1.87 calls has been bought to open for every 1 put on MCD. This ratio of calls to puts is higher than 68% of all those taken during the past year. An unwinding of this optimism could result in additional downside pressure for the equity.
Elsewhere, short sellers have largely ignored MCD, with less than 1.5% of the hot stock's float sold short. Should these bears perceive weakness in the company following its recent earnings report, a rise in short selling could be quite troublesome for MCD.
Finally, none of the 15 analysts following the security rate it a "sell." The firm was targeted by a wealth of negative sentiment from the brokerage bunch following its earnings report, however, receiving a price-target cut from RBC Capital Markets and a downgrade from S&P Equity Research. Any additional downgrades or price-target cuts could send more bullish investors scrambling for the exits, potentially pushing MCD sharply lower as a result.
To take advantage of this unwinding of optimism, traders should consider an in-the-money (57.50-strike) put option � the June put (premium is 8% of the stock price) or September put (premium is 11% of the stock price).
Burger King Holdings, Inc. (BKC)
Another security that finds itself unable to make headway in the current market environment is Burger King Holdings, Inc. (BKC) � home of the Whopper. The company pre-announced its third-quarter earnings on April 15, and investors reacted by sending the stock plunging more than 17%. The shares finally hit a short-term bottom near the 17 level, site of its late-October 2008 low.
However, BKC has rallied back into potential resistance at the 19 level, a region that provided support for the shares from November through December 2008, and could now switch roles and act as resistance. What's more, the stock's 10-week and 20-week moving averages have just completed a bearish cross - a technical formation that often portends additional losses.
Despite this poor price action, investors remain heavily bullish on BKC. The stock's SOIR of 0.36 indicates that calls nearly triple puts among near-term options. This ratio also ranks below 97% of all those taken in the past year. Meanwhile, the shares continued lower during the past 2 weeks, despite a 25% plunge in short interest, as selling pressure outweighed the spike in buying from short covering.
Wall Street is also overly enamored of the security, as 9 of the 12 analysts following BKC still rate the stock a "buy" or better. Downgrades from this bullish bunch could send the shares down for another test of the 17 area, or even lower, as more investors jump ship on the equity.
While Panera Bread Company (PNRA) is not exactly "fast food," the firm has a lot more in common with the McDonald's of the world than its does with the more traditional "sit down" restaurants. Despite its more expensive menu, PNRA has thrived in 2009. The stock market has soared more than 22% on a year-to-date basis, spiking some 53% from its early March lows. During this time frame, the shares have enjoyed the stalwart support of their 10-day and 20-day moving averages, which has helped usher PNRA within reach of multi-year high territory.
Despite the equity's impressive price action, investors are betting heavily against PNRA. The security's SOIR of 1.47 reveals that puts outnumber calls among near-term options. Additionally, put activity on the ISE and CBOE during the past 10 trading sessions indicates that nearly 4 puts have been bought to open on PNRA for every 1 call. This ratio is higher than 81% of all those taken during the past year, underscoring the growing pessimism toward the security.
The bears also rule the roost outside the options pits, as short interest accounts for a whopping 31% of the stock's total float. These naysayers may be in the midst of buying back their positions, however, as short interest slipped nearly 5% during the most recent reporting period. If this trend gains momentum, it could provide additional buying pressure for PNRA.
Finally, there is room for upgrades from the brokerage bunch, as 9 of the 13 analysts following PNRA rate the shares a "hold," according to Zacks. This heavy-handed pessimism on an outperforming stock has bullish implications from a contrarian perspective.
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