Cheesecake Factory (CAKE)
Jul
29
Written by:
7/29/2008 4:42 PM
Cheesecake Factory
(CAKE)
Try building a short
position in a name that has shown weakness.
The stock of The Cheesecake Factory
(CAKE) rallied slightly today off of it’s all time lows as the overall market rebounded
strongly when presented with decent earnings, a drop in the price of oil, and a
better than anticipated GDP number around the corner on Thursday. But Friday
and thereafter could continue the downtrend the DOW Industrials has been following
the last week.
Build a Short
Position
Selling short a stock like CAKE on
a day like today is a good way to begin building a short position. Sell short
25% of the position you want to eventually hold and look for additional early positive
days where the stock is trading 1-2% higher between 9:30 and 10:30 am. Each day
you are given the opportunity to sell at a slightly higher price should be
taken advantage of. If the fundamentals of the company change or the entire
market forms a bottom pattern, close out the position instead of continuing to
build.
The Stock
I selected
CAKE as the stock recently reached a new 52 week low, has had a good number of
analysts reduce earnings expectations for the current quarter, the next
quarter, and the year, is expensive on a P/E basis, has a lot of short
interest, and has a relatively low beta factor. There the stock will not theoretically
move wildly in the wrong direction at any one time.
The Trade
Look for a
3% move in the stock from your average sell price to begin taking some profits
and continually lower your margin stop on the stock as the stock moves lower. If
you are able to close out on 75% of the position with a 3% gain and have a
trailing stop 5% behind the current price, you could let the rest run until you
find a better prospect or the fundamentals shift.
I am only looking for a 6% gain on
the trade in a one week to a two week period. Using margin allows the 3% move
to net the 6% desired.