Sometimes stocks go up because they don't go down.
I know, sounds pretty oxymoronic. But take today's curious action in the stocks of Panera Bread (PNRA) , Buffalo Wild Wings (BWLD) , Caterpillar (CAT) and Boeing (BA) -- two restaurants, a heavy machinery company and the world's largest plane maker, respectively.
Yesterday, Stifel, a very good investment firm, did a very risky thing. It recommended that people sell Panera Bread, which is part of our Action Alerts PLUS charitable trust, on the same day that the company reported earnings. The Stifel analyst predicted that sales would not be strong and that the company's stock would get hammered when we saw the numbers. The analyst based his reasoning on pretty much of a broad macro call, meaning that the economy is slowing down and the restaurant business is the wrong place to be in a slowdown.
These are all reasonable assumptions.
But Panera Bread didn't stick with the script. Instead, it reported an upside surprise and gave you 4% comparable sales numbers and solid projections that those numbers could continue. I would call the results better than expected, but more importantly they were sharply better than what Stifel projected. So those who were betting against the stock were playing with the wrong thesis. The stock failed to go down, so they had to change direction and buy back their shorts. At the same time, people who were attracted to Panera Bread but just wanted to wait to see the quarter because they didn't want to be blindsided jumped in, too.
Voila, you get a run.
Buffalo Wild Wings is a little more complicated. I had heard whispers that its business was slowing, but I didn't know it was slowing as badly as the company revealed last night -- minus 2% comparable stores. That's just awful.
That's the bad news. The good news, though, is that Buffalo Wild Wings has a plan for a half-price wing night that has been trialed and is succeeding. It's got the Olympics coming up and the NFL, its money season. The commodity costs are coming down and it's developing a healthy takeout and delivery business. Plus, despite the same-store sales dip the company actually beat the numbers through cost cuts and reduced compensation -- something that caused many a bear to say, holy cow, I got the miserable comp number more than right but it didn't matter. There was no shortfall. There was no reduced-forecast ugly headline that always panics people out of a stock.
Without that there simply was no reason to bail, as you figure if this company can beat expectations when comparable sales are weak who knows how much money it can make if things get better.
Not only that, but best of all -- at least if you are long the stock, not short it -- there's an activist, Marcato, with a 5.1% stake that wants management to consider strategic alternatives, which we all know means a possible sale.
So let's lay the cards on the table or at least the chicken wings: You get short the stock because you hear the comparable stores will be weak, causing a shortfall and a forecast cut. You get the weak comp-store numbers but no cut, so there's no real reason to sell. The company offers a credible turnaround plan and you have an insurgent in there making noises to force Buffalo Wild Wings to bring about change or a sale. You want to be short that situation? I think that's a nightmare short. It demands that you cover. At the same time, like Panera, if you have been on the sidelines watching the stock fall, you now want to come in because you have every reason to believe the worst is over, and if it isn't, Marcato might be able to make something happen. Win win. Hmmm, maybe that's what the WWs in BDubs stand for.
OK, how about Caterpillar? CAT has become what I call a "consensus" short that the large-cap company hedge funds want to bet against because the end markets and customers for its products are doing so badly that it seems like a lay-up short every time it spikes. That's because you have high hopes, again, that you will get revenue and earnings shortfalls and a guide downward -- the holy trinity of what it takes to create enough sellers to knock the stock down.
For the longest time that's exactly what has happened, over and over and over again as CAT is four years into a downturn. How reliable is that? But something happened on the way to still one more disappointment. Caterpillar beat the estimates for the top and the bottom line. More important, while it did guide down for the rest of the year, if you actually took the time to listen to the conference call you realize that this is a company with sales and earnings that are most surely bottoming. Yes, it would be terrific if its customers in mining and oil were to see some lift in their sales. However, CAT has taken out so many costs that all that has to happen is for business to stay lousy and the company can still make a lot of money.
What is most germane if you are short Caterpillar? It gave you several downright positive data points. First, it said that the company's market position has improved, and I quote, "around the world and particularly China." Oh boy, that's not what you want to hear if you are short. Second, there has been a ton of inventory worked off at the dealer level that Caterpillar sells into. Third, Europe has gotten better. Fourth, there's been no further deterioration in any of its business lines with, and again I quote, "some improvement in mining on the horizon and in the aftermarket."
And here's the topper: CAT said that in the U.S., "anecdotally, a lot of our customers are busy across the country," including the best kind -- states that have raised taxes to rebuild infrastructure. Construction is the mother's milk for Caterpillar, and it's getting it. So, now you are shorting a stock that yields 4% that is telling you that after four years of a downturn it has hit bottom and, frankly, there is nowhere to go but up!
Finally. there's Boeing. What a horrendous set-up it had going into the quarter. First, the stocks of the airlines -- its customers -- have been hammered on weaker earnings. They are the worst performers in the entire market. Second, we just learned that American Airlines (AAL) is deferring gigantic orders to Airbus -- 22 wide body jets. That's hellacious for the group. Finally, it just took a massive $2 billion accounting charge last week.
So what happens when it reports? Boeing crushes the numbers, just annihilates them, both top and bottom lines, and then reaffirms the year. The cash flow is monstrous. The orders are pretty darned good.
The result? A huge move to the upside as there was simply no reason to sell a stock that is down more than 6% for the year with a greater-than-3% yield where the dividend can easily be raised.
That's a long, not a short. In fact, it's a good short spoiled.
It's like the shorts put on a party for four companies -- Panera Bread, Buffalo Wild Wings, Caterpillar and Boeing -- and the companies just didn't show up. They didn't follow the downbeat script. So, no one was scared, no one sold. Instead, just the opposite happened, leaving the shorts with nothing to hang their hat on. And that's how you get major moves up out of what looks to be whole cloth.