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Squeeze Nice Profits from the Cheesecake Factory (CAKE)

Mmm...a tasty trade


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Americans have been returning to the restaurant scene as the economy appears to be loosening consumer’s purse strings.  Companies like Cheesecake Factory (CAKE) have benefited with better-than-expected earnings results during the last quarter.  For the quarter reported in March 2013, CAKE surprised analyst by reporting EPS results that were more than 11% higher than expectations.  The surprise has helped the stock continue its market-beating performance, posting a year-to-date return of just over 21%.

The stock is breaking through to new all-time highs, disappointing short sellers that bet heavily against a continuation of the rally in CAKE shares.  According to the latest short interest report, bearish investors increased their short holdings in CAKE to more than 11 times the average daily volume, meaning that CAKE shares are presenting itself as a great short squeeze candidate.

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Another group that is behind the curve on CAKE is the analyst community.  As of this week, 72% of the analysts with an opinion rated the stock a Hold or Sell with only 28% of the analysts calling it right as Buy or Strong Buy.  The light analyst buy recommendation suggests that the stock could get help from upgrades.

Watch for a break above the $42 level to trigger the next move for CAKE as the shares are likely to set a course for the $45 mark over the next few months.  Stock traders can set up for the move by adding shares of CAKE to their portfolio.  A run to our target of $45 would garner a 7% return.  Options traders may opt for the leverage approach of purchasing the CAKE July 42 calls for a price of about $1.00 per contract.  This relatively short-term option would appreciate quickly on a move towards our target of $45.


Trader X frequents national investment conferences and has developed several market analysis tools that harness the powerful combination of behavioral analysis and technical analysis. He has decades of experience as a registered broker.

But we can’t reveal the source of this trade. Trader X’s privileged insight means he needs to be careful. He must act anonymously. While his identity can’t be known, Trader X will pull back the curtain to the trades he’s discovered.

Disclosure: Trader X was long CAKE at the time of publication.

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