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.