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Restaurants Like Cheesecake Factory Will Fall Behind

This morning, I am recommending a bearish put option on The Cheesecake Factory Inc. (NASDAQ:CAKE).

With the market staging a dramatic recovery in just the last few trading days, my indicators are giving bullish readings for the first time since mid-February.

They seem to be indicating that a bottom has been made, but they were not created to interpret stock price action during a global pandemic.

Therefore, while it does seem that a near-term bottom is in, I think the odds that we’ll see a V-shaped recovery like the one we saw in late December 2018 are very low.

With the market set to open lower this morning, I think it’s best for traders to be prepared with an insurance play.

Restaurants Won’t Make up Lost Sales

With most people staying in, stores, streets and restaurants are empty. This is truly an unprecedented crisis, and it feels like we’re living in a sci-fi movie in many ways.

Another way I’m thinking about this situation is that it is much like a rogue wave. Rogue waves are ocean waves that are much higher than normal, about 100 feet high. Such waves, based on linear models, should only occur every 10,000 years, but they can appear anywhere in the ocean without warning.

In the investment markets, we see the same phenomenon. Rogue waves hit stocks all the time. They are developments unexpected by anyone that cause the market to leap up or down in price quickly just like we are seeing now.

The problem for CAKE and other restaurants, is that sales lost to this pandemic won’t be made up.

Big consumer purchases like new dishwashers, engagement rings or cars still need to be made after the pandemic is over. Even if consumers can’t buy those things right now, they will eventually be able to buy them. That could lead to a surge in sales.

Meals at a restaurant or tickets to a movie are slightly different. While consumers may rush out once this pandemic is over, restaurants and movie theaters have limits to how much they can sell on a given day, and those limits will cap their recovery.

CAKE will suffer in the short term as a result.

Caught Between $14 and $21

CAKE has been bouncing back and forth over the past two weeks, and unlike the broader market, it hasn’t broken out of its trading range between $14 and $21.

Daily Chart of The Cheesecake Factory Inc. (CAKE) — Chart Source: TradingView

The stock received a bit of a boost from the stimulus news this week, but that won’t be enough to keep its share prices up for long. Even if the company receives loan assistance, consumers won’t be rushing out to spend their stimulus payments at restaurants like The Cheesecake Factory.

The stimulus will probably help CAKE survive this pandemic, but it won’t thrive, and I expect it to move toward the low end of its trading range in the short term. Traders can be ready with a put option with a strike price set at $12.50.

In this case, we don’t need the put option to be in the money in order to collect a profit. It will gain value if CAKE drops to support at $14.

Buy to open the Cheesecake Factory Inc. (CAKE) May 15th $12.50 Puts (CAKE200515P00012500) at $1.90 or lower.

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Article printed from InvestorPlace Media, https://investorplace.com/2020/03/restaurants-like-cheesecake-factory-cake-will-fall-behind/.

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