In 2006, The Cheesecake Factory (CAKE) was just another restaurant stock that had risen to unsustainable levels in my opinion.
In fact, I told readers to sell the stock short because I had seen too many fad restaurant chains come and go to believe that CAKE would be any different.
Ok, I was wrong. But I’m still not ready to dig-in yet.
CAKE shares have now fallen to below $20 per share as investors recalibrate the stock’s value in an environment of negative growth and rising inflation.
So far, CAKE’s decline has been rather orderly, but that may change if we see true capitulation in the market.
Dining out is a convenience and fickle consumers can be expected to jettison such a pleasure at the drop of a hat. (To find out which industry has not been affected by poor consumer sales, you’ll want to read “Retail Steals for Summer Profits.“)
Here’s another reason I’m not ready to bite: Next month, an increase in the federal minimum wage will take effect, which will inevitably cut into the chain’s profits and quite possibly forcing CAKE to raise their prices. Any price increase is hard for consumers to accept, given their already stretched budgets.
Value Investors: Let Them Eat Cake
These days, Cheesecake Factory is now looking more and more like a value stock. I certainly would not be a seller in this tough market.
But would I be a buyer? Not yet.
Sure, Q1 results matched analyst’s estimates, but same-store sales fell 1.8 percent.
In my opinion, CAKE has all the makings of a classic value trap. Shares look cheap, when in reality, the stock price could get quite expensive if Cheesecake’s earnings do indeed drop as expected.
I would steer clear of the falling knife until most investors throw in the towel.
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