Shorts Perk up at Dunkin’

11/21/2013 8:00 am EST


This coffee and donut firm has seen a significant spike in short interest; from a contrarian standpoint, the shares could benefit from this increased skepticism, suggests Terri Stridsberg, analyst with Schaeffer Investment Research.

Dunkin' Brands Group (DNKN) boasts a gain of 44% so far this year, and a 52-week advance of nearly 65% to wink at the $47.80 level. The stock also reached an all-time high of $49.40 on October 25.

Even so, short interest swelled by 29.1% over the most recent reporting period, and by 34.1% during the last two reporting periods. These pessimistic positions—which currently represent 6.7% of DNKN's float—could trigger a short-squeeze situation for the security.

This pessimism toward the coffee and pastry maven is evident in other areas as well. Data from the International Securities Exchange, CBOE, and NASDAQ shows a ten-day put/call volume ratio of 2.03 for DNKN, confirming puts bought to open have doubled calls during the past two weeks.

This ratio is just 4 percentage points shy of a 12-month peak, signaling traders have been picking up puts over calls at a near-annual high pace. An unwinding of these bearish bets could serve as a contrarian tailwind for the security.

Also of note, only eight of the analysts covering DNKN have handed out strong buy endorsements, compared to seven holds, and one strong sell suggestion.

Meanwhile, the stock's average 12-month price target of $50.22 denotes expected upside of just 5.1% from current levels. This leaves the door open for a round of upgrades and/or price-target hikes, which could help add to the security's upward momentum.

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