SONC - NOT A BRIGHT SPOT

Obviously this is not a bright spot for me to start the year.  Right now $9.43 represents the 2 standard deviation oversold line…..

 

From a fundamental perspective, SONC is getting killed by weather, a high concentration of partner drive-in stores in Texas and intense industry discounting.  Not all of this is new, but the magnitude of the impact was far greater than expected.  Today’s shellacking is probably over done on the downside, but it will take time for the stock to regain investor confidence. 

 

With two sell-side downgrades this morning on top of the already 5 sell recommendations (a lot relative to most other QSR names), I don’t think now is the right time to get incrementally more bearish on the name.  Add to that the fact that short interest on the name is high at 7.6% relative to the QSR group’s average of 6.5%.  I was obviously early on this name, but EBIT margin comparisons remain easy for the next two quarters.  This may not matter much to investors if we don’t see any abatement in same-store sales declines.  We know that fiscal 2Q10 is going to be another tough quarter from a top-line perspective, but management made that very clear yesterday on the company earnings call so that should be baked into expectations as of today.