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Conclusion:  Many shorts were squeezed by the better-than-expected top line results from earnings thus far.  Watch out for high short interest names and the risk of results surprising to the upside (or being less bad than expected).

Short interest has been building in a selection of names over the past couple of months (of reported short interest data) with PFCB, CMG, DPZ, PNRA, and BWLD being the most notable in both their respective increases in, and absolute levels of, short interest.  PFCB is reporting tomorrow and the street seems convinced that management’s assertion in July that the company stands a “reasonable chance” of achieving roughly $2 in earnings is slightly over-stretched.  There are several reasons why being short the stock ahead of earnings could be ill-advised.  Firstly, Knapp-track data and recent earnings results are showing buoyant top-line trends in the restaurant space.  Regarding PFCB specifically, management expressed confidence that the EPS target of $2 would hinge largely on top line momentum established in 1H10 continuing into the back half.  While my initial reaction to this target was one of skepticism, recent industry data and peer earnings results suggest that – absent significant market share loss – PFCB could be closer to achieving its target than the street thinks. 

CMG is a very different concept than PFCB and is at a different stage of their business development but their recent earnings caught many – myself included – by surprise.  One only needs to look at the surge in short interest over the last two months to realize that.  While there is a cogent short thesis on CMG, timing is everything and the squeeze on Friday underlined this fact.  Other names that I see as being dangerous to be standing in front of are JACK and PEET.  Both names are heavily shorted and trends around their respective categories have been less bad of late.   I believe BWLD will post a good quarter later today on the back of favorable commodity costs and also overall strong industry sales trends.  With the exception of the most recent two weeks reported, short interest has been building significantly in that name. 

SHORT INTEREST DATA - short interest 1025

Howard Penney

Managing Director