Don’t Chase BWLD Into the Clouds

by Serge Berger | November 5, 2013 2:12 pm

Last Tuesday, casual dining restaurant operator Buffalo Wild Wings (BWLD[1]) reported a Street-beating Q3, with BWLD earnings per share of 95 cents topping analyst estimates by a dime. Those earnings were a 67% year-over-year improvement, and came in on a better-than-expected $315.8 million in revenues.

Last but not least, Buffalo Wild Wings reported an increase in sales of 28% versus the same quarter one year ago.

Not surprisingly, Buffalo Wild Wing stock holders loved the news and bid the stock up 9% the following day to fresh all-time highs.  Traders and investors following BWLD over the years likely weren’t too surprised by the stock’s post-earnings rally, either, as through the medium- to longer-term lens, the stock has had a one-track mind to the upside.

Buffalo Wild Wings stock is simply an unstoppable force. While it gave up a large part of its gains after a 2-for-1 stock split in June 2007 and through the financial crisis of 2008, BWLD has risen steeply since late 2008. And BWLD has gone vertical right out of the gate this year, almost doubling so far in 2013 to the $150 mark.

bwld multi year
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However, this vertical move likely will end sooner rather than later as gravity sets in and BWLD inevitably has to undergo some mean-reversion. It’s too early to tell just how deep a mean-reversion move is in order because it depends from what level it takes place, but for my taste, chasing Buffalo Wild Wings higher at this price makes little to no sense — in any time frame.

The daily chart of BWLD looks just as scarily steep as the above chart, and flashes warning signs for anyone trying to buy into this rally.

bwld daily
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To be clear, I do not foresee some sort of collapse for BWLD but simply view the longs’ odds — considering the steep slope and duration of the rally, and compared to other stocks — less than favorable. This also does not mean that I want to be short BWLD as momentum is still on its side.

For now, options traders could consider selling out-of-the-money call spreads a few months out vs. Buffalo Wild Wings stock while the more active trader is better off waiting for a clear bearish reversal before shorting BWLD.

Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the “Essence of Swing Trading” eBook by clicking here[2]. At the time of publication, Berger had no positions in the securities mentioned.

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