Fast Food Finds

06/09/2006 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

"The only scenario under which the blue chips will outperform is the one like we’ve just experienced a major market decline," notes Bernie Schaeffer in his The Option Advisor. Despite his overall bearish outlook, he does find a pair of buys, both in the fast food field.

"If this decline morphs into an actual bear market, we will see continued large-cap outperformance. But if you’re truly bearish, why would you want to be invested in the blue chips? You’ll do better than most in a bear market but you will most certainly lose money, while 12-18-month risk-free CDs would have been paying you in the neighborhood of 5%.

"If you’re looking for the blue chips to lead the market on the next leg up, you’re playing a fool’s game. These moribund names simply lack the earnings growth (top or bottom line) to get bullish investors excited, plus the large-cap trade, which was already very crowded, is even more crowded now that the riskier sectors have been harder hit. Far too many analysts and fund managers are over-the-top bullish on the large caps, which means these names will remain starved for sideline money to power them higher.

"Krispy Kreme Doughnuts (KKD NYSE) recent announced that it reached a settlement in a class-action suit involving its retirement and profit-sharing plans. With that obstacle seemingly removed, the shares continue to enjoy the support of their ascending ten-week moving average, which has contained pullbacks three times this year. In fact, the last time the equity closed a week below this trendline was in January. In addition, KKD is holding above the nine level, which acted as resistance throughout March and April and could now provide support.

"The stock’s open interest ratio indicates that puts outnumber calls among near-term options, highlighting the heavy pessimism from the options crowd. Meanwhile, nearly 41% of KKD’s float is sold short and it would take more than 24 days to cover these shorted shares. This combination could provide the impetus for a substantial short-covering rally on any good news. Options investors should buy the January 2007 7.50 calls.

"Wendy’s International (WEN NYSE) has been in a solid uptrend lately, gaining more than 35% since October 2005. What’s more, the shares continue to outpace the S&P 500 Index on a monthly relative-strength basis, having bested this broad market indicator since October 2004. Additionally, WEN is trading above peak call open interest for near-term options at the 55 strike, leaving the path higher relatively smooth from a structural resistance standpoint.

"Despite this solid performance, investors remain sour toward WEN. In the options pits, the equity’s open interest ratio ranks above 92% of all those taken during the past year. Wall Street is also rather pessimistic when it comes to WEN. According to Zacks, nine of the 11 analysts covering the security rate it a "hold" or worse. Should this bearish bunch have a change of heart and issue upgrades, it could provide a boost for the equity. Options investors should buy the January 2007 50 call."

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