One of our top short ideas has been trading well over the past couple of days. The reasons for this pop, if we are identifying them correctly, should not be afforded too much weight in terms of the viability our short thesis.
We currently have the following ideas on the Hedgeye Restaurants Alpha List:
LONG: MCD, YUM, EAT
SHORT: DNKN, BWLD
Over the last two trading days our short position in Buffalo Wild Wings is under attack; the stock was upgraded on Friday and the WSJ published a bullish article on the stock today. BWLD traded up 3.4% on Friday (still down on the week) and is trading up another 5% today. Friday’s upgrade included a reduction in estimates but also an increase in the price target.
Our short call for BWLD is predicated on our conviction that wing price inflation in 4Q11 and 1Q12 will cause the company to perform below current expectations. We believe that the risk that the company fails to meet its 20% EPS growth goal in 2012 is underappreciated.
Looking at EPS revision trends for 2012, BWLD has recently joined a group of companies that been underperforming on an earnings basis: DRI, CAKE and PFCB. I think this is just the beginning and we will see more estimate cuts and possibly some downgrades as we get closer to the reporting of 4Q11 EPS and clarity on where 2012 guidance is going to shake out.
With respect to EAT, our lone casual dining long idea on the Hedgeye Restaurants Alpha list, we are of the opinion that the Street is overly conservative in its outlook for 2012.
Howard Penney
Managing Director
Rory Green
Analyst
