The following is a research update to Peridot Capital’s Select List model portfolio. Readers may sign up for a 30-day free trial to the Select List which has outperformed the S&P 500 by more than 8% year to date.
Taking Profits in Cheesecake Factory
April 22, 2009
After a 49 percent increase in the Select’s List consumer discretionary pick, upscale casual dining franchise Cheesecake Factory (CAKE), we are taking profits in the model portfolio. There are two reasons for taking our CAKE chips off the table.
The first is simply due to the move the stock has had year to date. We added shares at $10 and as of Wednesday they are trading above $15, for a gain of nearly 50% in less than 4 months. Although the economy is showing signs of stabilizing, restaurant traffic and net margins for companies with high fixed costs (of which restaurants are a great example) will continue to see profits squeezed. We like CAKE as a leader in the upscale casual dining industry, as well as their ability to maintain profitability during this recession, but the stock has nearly tripled from its lows ($5 per share) and we believe profit taking is in order.
Secondly, we are concerned about the short term direction of the stock market in general. Stocks have risen for 6 consecutive weeks and now appear overbought in the short term. While this condition alone does not ensure the market will correct, we believe the odds heavily favor the next 10% move in stocks being to the downside. Such a correction would likely be on heels of negative economic news which would especially hurt higher beta, economically sensitive stocks such as consumer discretionary names (including CAKE).
For these reasons we are removing CAKE from our Select List model portfolio at a large profit. We will add another consumer discretionary name shortly, either from those which have not had such a huge run higher lately, or in the midst of a forthcoming correction if we see such a market reaction in the short term.
Full Disclosure: No position in CAKE at the time of writing but positions may change at any time
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