A Closer Look at... Chipotle Mexican Grill, The Cheesecake Factory, and Brinker International

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While Wall Street's confidence in consumers continues to grow with practically every economic report, there is not much faith in retail stocks. In fact, analysts at a recent Barron's Roundtable were mostly "neutral" on these names for 2011, despite retail being one of the best-performing sectors of 2010. What's more, the restaurant and casual dining stocks within the sector appear to be doubly overlooked, given the wealth of investor pessimism amid strong technical backdrops.

For instance, the PowerShares Dynamic Food & Beverage ( PBJ ) exchange-traded fund ( ETF ) has rallied more than 27% during the past 52 weeks, compared to the S&P 500 Index's (SPX) gain of roughly 11.5% for the same time frame. Technically, the ETF has rallied steadily along support at its 10-week and 32-week moving averages since the March 2009 bottom. What's more, the ETF has toppled long-term resistance at the $18 level, a region that created a ceiling for PBJ between April and June in 2007. The area should now provide a springboard of support for the ETF.

Weekly chart of PBJ since April 2007 with 10-week and 32-week moving averages

Despite this strong price action, investors remain quite bearish on PBJ. For instance, 184, or 83%, of the 337 ratings on PBJ holdings are "holds" or worse, according to Zacks data. Furthermore, short interest on the ETF has rocketed nearly 500% higher during the most recent reporting period. Should the ETF continue to push higher, we could see these bears abandon their losing positions, thus resulting in a significant tailwind for the sector.

The Cheesecake Factory Inc.

The Cheesecake Factory Incorporated ( CAKE ) owns and operates more than 140 casual-dining restaurants in 35 states that offer about 200 menu items ranging from sandwiches and salads to steaks and seafood, according to Reuters . Naturally, the company specializes in cheesecake, which comes in about 40 varieties, including Chocolate Tuxedo Cream and Kahlua Cocoa Coffee. In addition to its eponymous restaurant chain, the company operates more than a dozen Grand Lux Cafes.

Technically speaking, CAKE has been quite the outperformer during the past 52 weeks, soaring more than 45% during this time frame. This strength has waned in recent weeks, but the stock has pulled back to potentially stout support in the $30-$31 region. This area is currently home to CAKE's rising 10-week moving average, and was also the site of solid resistance in October-November 2006, April 2007, and May 2010. As such, this region could now switch roles and provide a springboard of support for the equity.

Weekly chart of CAKE since March 2009 with 10-week and 20-week moving averages

Despite this strong price action, investors are having a hard time accepting the stock's current uptrend. Among options traders, the stock's Schaeffer's put/call open interest ratio (SOIR) arrives at 1.36, as puts outnumber calls among near-term options. What's more, put buying is growing in popularity on the International Securities Exchange (ISE) and Chicago Board Options Exchange ( CBOE ), as nearly three puts were bought to open for every one call purchased during the prior two weeks.

Analysts are also betting against CAKE, as 19 of the 27 brokerage firms following the shares rate them a "hold" or worse. The firm also sports a 12-month price target of $31.90 per share, according to Thomson Reuters - a mere pittance of a premium compared to the stock's close at $31.10 on Thursday. As such, any upgrades or price-target increases could provide additional buying pressure for the security.

Finally, short interest accounts for a sizable 13.36% of the stock's total float. However, the number of CAKE shares sold short have dropped by nearly 9% during past month. Should this short-covering trend gain momentum, it could provide additional fuel for the equity's rally.

Traders looking to take advantage of an unraveling of the bearish sentiment levied against CAKE should consider the stock's February 30 call.

Chipotle Mexican Grill Inc.

Another restaurateur with excellent bullish prospects is Chipotle Mexican Grill Inc. ( CMG ). According to Reuters , Chipotle develops and operates fast-casual, Mexican food restaurants in 35 states throughout the United States, the District of Columbia, and Ontario, Canada. The company operates roughly 956 restaurants, and offers a focused menu of tacos, burritos, salads, and burrito bowls.

From a technical perspective, CMG has rallied more than 162% during the past year, and has bested the SPX by nearly 16% on a relative-strength basis during the prior 60 trading days. The shares have rallied steadily along support at their 10-week and 20-week moving averages since December 2009, surging past the psychologically significant $200 level in the process. Currently, the shares are in the process of rebounding from support in the $210-$215 region, which is currently home to CMG's rising 80-day moving average.

Weekly chart of CMG since December 2009 with 10-week and 20-week moving averages

On the sentiment front, there are plenty of CMG bears that could be shaken out of their short positions should the shares extend their current rebound. Starting with options traders, puts are quite popular among CMG speculators, with the equity's SOIR of 1.49 ranking above 71% of all those taken during the past year.

That said, sentiment may be shifting among options traders. CMG's ISE/CBOE 10-day call/put volume ratio of 1.18 arrives above 78% of all those taken during the past year, pointing toward a growing preference for bullishly oriented call options. Should call buying gain additional traction, it could provide lift for the security.

There is also room for potential upgrades on CMG. According to data from Zacks , 15 of the 25 analysts following the shares still rate them a "hold." If any of these fence-riders decide to upgrade the security, it could bring more buyers to the table. Traders looking to take advantage of an extended rally by the equity should consider a February 210 call.

Brinker International Inc. (EAT)

One final dining stock to consider is Brinker International Inc. (EAT). According to Reuters , Brinker is the world's No. 3 casual-dining operator in terms of revenue, with more than 1,650 locations in about 30 countries. Its flagship Chili's Grill & Bar chain boasts more than 1,450 outlets, and trails only Applebee's as the largest full-service restaurant chain. The company also operates Maggiano's Little Italy, but sold its On the Border Mexican Grill & Cantina restaurant brand to OTB Acquisition LLC on June 30, 2010.

Zacks

Technically speaking, the stock is on solid footing, having rallied more than 47% during the prior 52 weeks. This rally has placed EAT above formerly stiff resistance in the $20-$21 region, an area that had capped the shares since June 2008 until their breakout in early December 2010. Additionally, EAT enjoys the support of its 10-week and 20-week moving averages, which have ushered the stock higher since August 2010.

Weekly chart of EAT since June 2008 with 10-week and 20-week moving averages

Checking in with investor sentiment, options traders are quite bearish toward EAT, with the stock's SOIR of 1.99 indicating that puts nearly double calls among options with less than three months until expiration. This ratio also arrives at an annual peak, meaning that speculators have not been more bearishly aligned during the past year. Furthermore, EAT's ISE/CBOE put/call ratio arrives at a whopping 23.67, as calls bought to open have outnumbered puts purchased by a factor of more than 23 to one during the prior two weeks.

Finally, short interest accounts for a respectable 7.3% of the stock's total float. That said, short sellers appear to be in the process of liquidating their positions, as the number of EAT shares sold short dropped by 27% during the prior month. Given this data, investors might want to consider a February 20 call to take advantage of a potential unwinding of this negativity.

The winter 2011 issue of SENTIMENT magazine is now available here.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

All Rights Reserved. Unauthorized reproduction of any SIR publication is strictly prohibited.


This article appears in: Investing , Options

Referenced Stocks: CAKE , CBOE , CMG , ETF , PBJ

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