Short Sellers Sink their Teeth into Struggling Cheesecake Factory Stock – Schaeffers Research (blog)

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Overall, restaurant stocks were solid in 2016. According to data from Schaeffer’s Senior Quantitative Analyst Rocky White, the stocks under our “restaurant” umbrella sport a collective year-over-year gain of 12.1%. More recently, however, the sector has struggled, with White’s data showing an average year-to-date gain of just 2.8%. One stock that perfectly encapsulates this sudden change is Cheesecake Factory Inc (NASDAQ:CAKE). Let’s take a closer look at CAKE stock below. 

Starting on the charts, Cheesecake Factory shares touched a record high of $67.14 on May 3 thanks to a mostly steady multi-year ascent. However, CAKE stock got crushed back on June 13, after the company issued a surprisingly disappointing second-quarter same-store sales outlook. The shares have continued to edge lower since then, and at $49.70, are on pace for their lowest close since Oct. 26. What could be even more troubling for shareholders is the fact that CAKE is on the verge of closing below its 36-month — or three-year — moving average in consecutive months for the first time since late 2009. 

cake stock today

Part of the recent selling pressure could be connected to elevated interest from short sellers. Specifically, short interest on Cheesecake Factory stock is at its highest point in five years, even after edging lower in the previous two reporting periods. As it stands now, short interest accounts for almost 20% of the stock’s float.  If CAKE’s technical — and possibly fundamental — weakness further emboldens these bears, it could hurt the shares’ performance. 

As for the broader restaurant sector, increasing short interest is actually an anomaly. White’s data shows the 20 stocks we cover in the sector have cumulatively seen short interest fall by almost 9% over the past 52 weeks. 

In the meantime, short sellers could be using call options to hedge their positions. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 50-day call/put volume ratio of 2.28 for CAKE, which ranks in the 88th annual percentile. 

It’s actually a good time to buy short-term CAKE options. Specifically, the shares have a Schaeffer’s Volatility Index (SVI) of 24%, which ranks in the low 23rd annual percentile. This means near-term options are unusually cheap, from a volatility perspective. But for those speculating on more downside for Cheesecake Factory stock, be warned: its 14-day Relative Strength Index (RSI) landed at 28 as of last night’s close, meaning it’s technically oversold and could be due to bounce. 

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