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RoboStreet – March 28, 2019
Special Situations Make Sense in Nervous Market
The roadmap for the bull market got blurred this past week after the sharp downward revisions for the European economy triggered a sharp spike in U.S. Treasury prices that produced an inverted yield curve. Investors fearful of what this might mean and whether a recession is looming chose to sell first and ask questions later. Friday’s sell-off was the biggest one-day drop for stocks in 2019, but the S&P found support on its rising 20-day moving average that comes into play at 2,800.
There was a substantial flight towards quality late last week with the defensive sectors all being bid higher. Capital flows into utilities, REITs, telcos, and consumer staples which were very bullish, not only for their non-cyclical characteristics but also for the hefty dividend yields they pay. When the 10-year U.S. Treasury is yielding only 2.39% and these noted sectors are paying of 2.5%-6.0% for blue-chip quality where qualified dividend income is taxed at a lower rate than bond income.
And while that safe haven trade can get quickly crowded by both institutional and retail investors, there are always special situations within popular sectors that take on a bull market of their own because of unique circumstances. We live in a time where activist-investing plays a large role in the future of many companies that have not executed their business models to the satisfaction of large shareowners.
And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
When dissatisfaction or frustration gets to a certain point, big hedge funds and activist funds step in and demand changes to optimize shareholder value. And this is exactly was has recently occurred at Papa John’s International (PZZA) and why it makes for a compelling investment proposition at its current price of $52. The company is in the midst of some major changes within its management team, board, and marketing arm due to the influence by New York-based investment house Starboard Value LP.
Earlier this year, Starboard invested $200 million IN Papa John’s after the company’s brand was tarnished heavily by its founder and CEO John Shnatter for racial comments on a company conference in July 2018. The stock fell to a multi-year low of $38 rallied back to $60 and was summarily sold off again in late November after the company reported a big drop in sales and earnings.
Starboard announced its investment on February 4, 2019, and has made some big changes since. Starboard replaced the board with its own hand-picked people, brought in basketball legend and TV ad celebrity Shaquille O’Neil last week to reinvigorate the brand presence and yesterday announced the hiring of Karlin Linhardt as Global Chief Marketing Officer after serving senior roles at Subway Restaurants and McDonald’s.
The fast-food business is extremely competitive and is why key people with global experience that know how to successfully scale a business built on franchises are essential to the performance of the underlying stock. And Papa John’s has now filled a critical position by bringing on Mr. Linhardt as the Chief CMO position that has been vacant since August 2018. Going forward we should see new and fresh-looking ad campaigns that reinvigorate the Papa John’s brand.
Before waging their $200 million in the company, Starboard conducted a blind taste test of the leading pizza brands and Papa John’s came out as the clear winner. So, with the product being the best in class, the job of restoring the company’s image is the task in front of the board and the new marketing team. This is a problem that can and will be fixed in good time. To this point, the stock has real potential.
The stock has started to recover on the series of bullish headlines and I suspect the new marketing efforts will restore sales and earnings growth in good time. This week Stifel upgraded Papa John’s to Neutral from Sell and I expect more favorable rating changes will follow in the weeks and months ahead. But until the numbers improve from being sharply lowered coming into 2019, PZZA is a special situation story stock for now.
My Tradespoon AI tools will be instrumental in revealing decisive entry and exit points in a stock not supported by currently strong financials. Trading off of headlines can be fleeting, so having a platform in place that can see under the hood of how a stock trades on the screen is essential to knowing if the trend is a short-term trade or something longer lasting.
My AI system is loaded with proprietary indicators that bring substance to every buy and sell recommendation – and this is what you pay for when you sign up for my RoboInvestor service. I manage a model portfolio of around 20 stocks and ETFs that fall within my strict parameters for each and every trade. I better be convinced because I’m putting my investment capital work alongside yours. I’m no paper tiger. Your risk is also my risk.
Thankfully, the risks have proven to provide outstanding rewards since we launched RoboInvestor and we’re having a standout year-to-date run with first-quarter earnings season about to unfold. Sign up for RoboInvestor today and pay for the entire subscription with the next two trades I’ll be releasing this Sunday!
And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
*Please note: RoboStreet is part of your free subscription service. It is not included in any paid Tradespoon subscription service. Vlad Karpel only trades his own personal money in paid subscription services. If you are a paid subscriber, please review your Premium Member Picks, ActiveTrader, MonthlyTrader, or RoboInvestor recommendations. If you are interested in receiving Vlad’s personal picks, please click here.
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