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Oppenheimer Gives Papa Johns International Perform Rating

Posted: 19 Sep 2019 03:00 AM PDT

Investment firm sees opportunity in pizza business.

Oppenheimer started coverage on Papa John's International (PZZA), starting the company out with a Perform rating.

The company sees the current valuation of the company as reasonable, but has long-term potential. The company's international operations have room to run, and the company is also seen as a potential acquisition target in the future if the company's turnaround continues.

Papa John's has struggled in recent years as pizza sales have declined and the board of directors replaced the company founder.

As the company has been making a directional shift and improving earnings, shares have rallied. They're up 12 percent in the past year, but 36 percent off their 52-week low, and now priced at 34 times forward earnings.

Action to take: As a "Perform" rating isn't as strong as an "outperform" rating, and as shares are already up so far from their low, investors would be better off waiting for prices to cool. Investors who buy in the low $40 range are likely to fare better.

Speculators betting on a continued improvement in earnings or a surprise buyout offer could consider the April 2020 $60 calls, but the risk looks high relative to the potential reward. A better bet is to trade elsewhere in the food space with an unloved, out of favor name.

 

Unusual Options Activity: Nvidia (NVDA)

Posted: 19 Sep 2019 03:00 AM PDT

In-the-money call option suggests further gains for shares.

The November 2019 $165 call options on Nvidia (NVDA) saw over 3,300 contracts trade against a prior open interest of 281, making for a 12-fold increase in volume.

With shares of the company currently trading at $180, the contracts are already $15 in-the-money. With the contract trading around $21, shares of the company need to rise at least another $6 for the call buyer to break-even on the trade before the option expires in 57 days.

Nvidia, the graphics processing giant, has seen its shares decline 33 percent in the past year against a small, 4 percent gain for the overall S&P 500 index. Shares of the growth company are at 40 times current earnings, but 25 times forward earnings, and many other tech companies have lagged the market in recent months, a situation starting to look like an interesting buying opportunity.

Action to take: Shares are likely to continue to rally, and we like the in-the-money call option as a way to trade shares. But the November strike date comes right as the company reports earnings in the third week of November.

Instead, consider the January 2020 $175 call option is slightly less expensive while still being in-the-money, and also gives more time for the trade to play out, including any post-earnings bounce that may take more than a few days.

 

Insider Activity: Tailored Brands (TLRD)

Posted: 19 Sep 2019 03:00 AM PDT

Multiple insiders buy at beleaguered retailer.

Dinesh Lathi, President and CEO of Tailored Brands (TLRD), bought 15,000 shares recently. So did director Theo Killion on the same day.

Both paid around $4.60-$4.80, slightly above where shares now trade at $4.55. Both paid around $70,000 for that stake, and both increased their total ownership in the company by over 33 percent.

Tailored Brands, owner of retailers Men's Wearhouse and Joseph A. Bank, has seen shares drop 82 percent in the past year on slow sales.

The company is also saddled with over $2 billion in debt, which, with the company's market cap of $200 million, indicates that investors are bailing on the company and pricing in a potential bankruptcy, even as shares trade around 4 times earnings. Shares have traded as high as $26 in the pat year.

Action to take: With almost 70 percent of the company's shares held short right now, there could actually be a short squeeze in shares, where short-sellers panic to buy back shares on the open market and can't find them. That's the only outcome we see where shares move higher from here, given the company's poor earnings potential.

To play the trade, we suggest avoiding shares and buying a January 2021 $5 call. Trading for around $1.65, a squeeze sending shares doubling to $10 would turn the call into $5, or a triple-bagger profit.

 

Fed Cuts Interest Rates Another Quarter Point

Posted: 19 Sep 2019 03:00 AM PDT

Central bank cites rising risks, strong but slowing labor market.

By a vote of 7 to 3, the Federal Reserve approved a quarter-point cut in interest rates. The new fund rate is a target between 1.75 and 2.0 percent. This is the second rate cut in a row, and was widely expected by the market.

The Fed noted that it still sees expansion of economic activity, and even cited GDP growth as likely in the 2.2 percent range this year.

The bank also cited inflation numbers, which were low and below the 2 percent inflation rate goal.

Of the three dissenting votes, two voted for no change in rates, and one Fed president, James Bullard, preferred to cut rates by half a percent instead of the quarter-point cut. The bank is more divided on further rate cuts this year, with only half, or 5 of the 10-member committee seeing a further rate cut in 2019.

Action to take: The Fed is relying on much of the same data as we review in terms of industrial production, the job market, and so on. We see slowing economic growth as well. While not a recession, it could weigh on the stock market's returns from here.

The best way to play this trend is to reduce speculative positions, taking profits where appropriate, and raising cash, with the expectation of being able to buy shares back more cheaply in the coming months.
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