Too Much Baked in to This Stock

07/27/2009 10:48 am EST

Focus: STOCKS

Elizabeth Harrow

Financial Analyst, Schaeffer's Investment Research, Inc.

Elizabeth Harrow of Schaeffer’s Investment Research says there’s too much optimism on the stock of Panera Bread, and much hinges on Tuesday’s reported earnings.

An optimistic article on Panera Bread (Nasdaq: PNRA) in USA Today notes that the company has managed to thrive during the recession by doing the unexpected. Rather than introducing value meals, PNRA rolled out items such as a $7.59 chopped Cobb salad. Plus, the bakery chain raised prices twice last year, on bagels and soup, respectively. "We're contrarians to the core," says [chief executive officer] Ron Shaich. "We don't offer a lower-end strategy."

Shaich is trying to raise PNRA's profile not by pandering to the craze for "recession friendly" meals, but rather by ramping up quality to enhance the brand's luster. The chicken served is raised without antibiotics, bread is now fresh-baked all day long, and new, faster grills are being tested for paninis. It also doesn't hurt that PNRA, unlike other restaurant chains, has no direct competition from a national rival in its niche market.

As a result of the company's tunnel-vision focus on its key principles, says the author, PNRA's upcoming "quarterly results, due Tuesday, are expected to be fine."

As a contrarian, Shaich has just cause for concern ahead of his company's earnings report. The stock has recently seen its positive momentum slow, with the shares bouncing between support near $48 and resistance at $55 since early May. Despite this sluggish price action, optimism appears to be running high on PNRA.

In fact, the equity's Schaeffer's put/call open interest ratio (SOIR) is currently docked at 0.62, marking its lowest level during the past 52 weeks. In other words, short-term option players are more bullishly aligned toward PNRA now than at any other time during the past year. In keeping with this theme, traders on the International Securities Exchange (ISE) have bought to open 1.36 times more calls than puts during the past two weeks.

Meanwhile, many short sellers have already unwound their bearish bets. Short interest on the shares fell by 5.4% during the most recent reporting period, but the resulting buying pressure was insufficient to propel PNRA out of its trading range.

While the shares aren't necessarily poised to plunge during the short term, the preponderance of optimistic speculation ahead of earnings is a red flag. Even if PNRA continues its trend of topping the Street's earnings expectations, there's already plenty of bullish sentiment priced into the shares. As a result, up side could be limited in the wake of the firm's quarterly report.

(The stock closed above $55 Friday, and analysts expect Panera to report earnings of 64 cents a share for the quarter ending June 2009—Editor.)

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