Jack in the Box (NASDAQ: JACK) could soon deliver a surprise.
There’s rising short interest in the fast-food chain’s stock, and it appears as if Jack in the Box could become the market’s next big short squeeze.
That’s according to Danielle Shay, director of options at Simpler Trading.
“I like Jack in the Box here, but for a short-term options trade,” Shay said this week, adding that while the stock is near all-time highs which would usually dissuade her from buying in, she’s made an exception given that the stock currently has 9.2% short interest.
“With something like this that has short interest, it does have the potential for a short squeeze and it has earnings coming up,” Shay continued. “For that reason, I do like to trade shorter-dated calls in the earnings series. That way, I can take advantage of just the momentum going into the earnings report and the rise in [implied volatility].”
Short squeezes have been a hot topic lately after a frenzied short squeeze spurred GameStop (NYSE: GME) and several of the market’s other most shorted stocks far higher late last month fueled by an army of retail investors inspired by the WallStreetBets subreddit.
But even if a short squeeze pushes Jack in the Box higher in the short term, there are other restaurant stocks that look like better bets for the long-term.
“If you look at a weekly chart of McDonald’s (NYSE: MCD), it has been consolidating for quite some time,” Shay said. “I do believe that that consolidations going to break out to the upside. I’m targeting $240.”
Zooming in to the daily chart, McDonald’s appears to have broken out of a falling wedge that the stock has been stuck in since October.
The burger chain closed at $213.45 on Wednesday, and Shay’s $240 price target suggests nearly 13% upside.
One thing creating buzz for McDonald’s is that the company is preparing to enter the chicken sandwich wars with a lower-price sandwich compared to peers, which is expected to be launched on February 24. Citigroup analyst Sergio Matsumoto said in a note earlier this month that McDonald’s existing chicken sandwich “already ranked surprisingly high, or #2 behind category leader Chick-Fil-A,” which bodes well for its new menu items.
“As such, upgraded chicken sandwich could bring many early adopters and repeat purchases,” Matsumoto said.
Piper Sandler’s Craig Johnson says another name in the space looks like a good bet now: Chipotle Mexican Grill (NYSE: CMG).
Pointing to the stock’s chart, Johnson said that Chipotle has “been a long-term winner. It’s a name that we’ve owned in our model portfolio for some time and we still think it should be bought.
Johnson noted that Chipotle shares are trading above the 50- and 200-day moving averages and is in an upward channel, showing strong performance relative to the S&P 500.
“This stock looks like it still has room to run,” Johnson added.
While Chipotle missed on earnings per share in its latest quarter, the company reported that its same-store sales rose 5.7% and its digital sales nearly tripled, increasing 177% year-over-year in the quarter.
As its digital sales continue to exceed expectations, CEO Brian Niccol said the company plans to open hundreds of new restaurants this year.
“We plan on opening 200 and hopefully more than 200 restaurants in 2021, which would be, you know, a real exciting thing for us to return back to 200-plus openings,” Niccol said, some of which may be in Chipotle’s new digital-only restaurant format.
Another name Johnson likes is Chili’s parent Brinker International (NYSE: EAT).
“On a weekly chart looking back a handful of years, you’ll see that you’ve finally reversed a downtrend off of those ’14 highs and now we’re breaking out to new highs,” Johnson said.
Much like McDonald’s is entering the chicken sandwich wars, Brinker has jumped into the chicken wing fray
America’s appetite for chicken wings has surged amid the pandemic, and Brinker launched its It’s Just Wings out of 1,000 locations last June with the goal of using idle kitchen space due to the pandemic to deliver the wings.
The brand is delivered via DoorDash and is on track to deliver $150 million in sales in its first year, accounting for around 5% of Brinker’s annual revenue. The company plans to expand into takeout and put more marketing dollars behind the It’s Just Wings concept as demand accelerates.
“We believe there’s significant upside” for the brand, said Brinker CEO Wyman Roberts. “We’re focused on building it into a strong, sustainable brand.”
As for the group as a whole, “It looks like a lot of these restaurants are looking in really good technical shape for another leg higher,” Johnson concluded.