Domino's Could Serve Up an Entry

 | Aug 02, 2012 | 11:30 AM EDT
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Late last year, pizza restaurants were some of the best price-gainers around, and the surge in Papa John's (PZZA) Wednesday reminded me of those days. The pizza chain's shares zoomed nearly 8% at the opening, but retraced much of that move, finishing with a gain of 1.3% on the session at $51.65.

Thursday's session peak of $56.41 was also an all-time high. Papa John's raised its full-year guidance and reported strong same-store sales in the second quarter. The stock's intraday pullback was roughly in tandem with the same action in the wider market.

Even before Wednesday's price move, Papa John's was showing price-leadership traits. The stock had been getting solid 10-week support after gradually pulling back from its July 18 high of $52.87. As of Thursday's close, the shares were beneath that earlier high, and they still remained above short- and medium-term price lines.

Papa John's action Thursday is a perfect illustration of why I usually avoid buying in the early part of a session, particularly at the open. It's not uncommon for a stock to gap higher, and then to give up some of those gains as the session wears on. As of now, Papa John's is a potential buy, depending on how it and the general market hold up in the coming sessions.

But Wednesday's move reminded me of a couple other pizza-pie purveyors that hadn't shown up on my scans in quite some time.

One of these, Domino's (DPZ), has been consolidating since March -- and the current basing area is potentially bullish, as its June 4 low of $28.17 undercut the low of the previous pattern. This is often constructive, as that bottoming action serves to flush out weak holders and clears the path for value-oriented buyers to grab shares at a lower price. In a company like Domino's, where analysts have been eyeing strong income growth, many investors can make a strong case for scooping up shares when the stock appears to have bottomed.

Personally, I prefer to see greater technical strength to go along with the fundamentals -- and, lately, the action has been encouraging. Domino's five-day exponential moving average crossed above its 15-day line in late June. This is frequently a signal that a tradable uptrend is in place, and that was indeed the case here.

Since June 28 Domino's has advanced 13%, remaining mostly above its five-day line. It dipped down to its 15-day line July 23, the same day the Nasdaq gapped lower. Domino's went back into rally mode the next day, putting in a better showing than did the index.

The stock declined 1.2% in light volume Wednesday, resting just at its five-day line. If it takes a breather beneath that line, getting support above the 15-day, it could offer a new technical entry point in the not-so-distant future.

Away from Domino's, I revisited a name that I hadn't looked at in several months -- and I realized why. Pizza Inn (PZZI), a small Texas-based chain, is now trading about 67% below its December high of $7.07. Even as I was tracking the stock late last year, I considered it speculative. Not only was it priced in the single digits, but the company has low market capitalization, and the stock is extremely thinly traded. Its average volume is just 27,000 shares per day.

It's currently trading at 52-week lows, having erased the entire gain it made from May through December of last year. At this point, the stock holds zero interest for me.

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