Papa John's International, Inc. (PZZA) has entered damage control mode after the board approved a Rights Plan, also known as a poison pill, to keep ousted founder and major shareholder John Schnatter from seizing majority control. The news marks the latest in a series of events that have dropped the fast food giant to a two-year low while marking the biggest scandal to hit the restaurant industry since 2015's food poisoning outbreak at Chipotle Mexican Grill, Inc. (CMG).
The pizza maker, named after its departed founder, is unlikely to repair damage to its tainted brand for many months. Consumers have a bewildering variety of choices when it comes to the oversaturated pizza genre, and many folks will assume that the CEO's racial slur reflects the company culture rather than an individual's ill-advised comment. As a result, it makes sense to follow the Chipotle strategy and sell rallies aggressively, perhaps into the next decade. (For more, see: Chipotle: Rise and Fall of a Wall Street Darling.)
PZZA Long-Term Chart (1993 – 2018)
The company came public at split-adjusted $2.25 in June 1993 and turned higher, stalling at $3.70 in 1994. It mounted that resistance level one year later, entering a healthy trend advance that eased into a shallow trajectory in 1996 before topping out at $11.85 in 1999. It sold off to a four-year low at the start of the century, while the subsequent recovery wave took five years to reach the prior decade's high.
A 2005 breakout added just six points before stalling in the upper teens in 2006, with that peak marking the highest high for the next five years, ahead of a downturn that accelerated during the 2008 economic collapse. It posted a five-year low at $6.39 and bounced into the mid-teens in 2009, entering a sideways pattern that attracted buying interest in 2011. The stock completed the round trip into the prior high in 2012 and broke out, entering the strongest uptrend in its public history.
Volatility escalated in 2014, generating three higher highs that ended at an all-time high at $90.49 in December 2016. The subsequent downturn accelerated in November 2017 when the company disavowed the founder's comments on the NFL's take-a-knee controversy. Broad weakness since that time has dropped the stock to the lowest low since February 2016. The monthly stochastics oscillator crossed into a buy cycle in January 2018 but failed the bull signal in June, dumping back into the oversold level.
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PZZA Short-Term Chart (2016 – 2018)
The decline reached the .786 Fibonacci rally retracement level in May 2018, with price action in the past three months crisscrossing that level repeatedly. This often signals a bottoming pattern, but the monthly stochastics double dip indicates severe bearishness that could presage a selling wave into the 2016 low at $44.47. The weekly stochastics recently entered a buy cycle, balancing the odds while telling short sellers to keep their powder dry for now.
On-balance volume (OBV) ended a multi-year accumulation phase in 2015, nearly a year and a half before the stock topped out, and fell in multiple waves into November 2017. The subsequent buying wave hit a wall of aggressive selling pressure, but the indicator remains above the prior low, which is mildly bullish. Sharp price and indicator swings appear connected to high short interest, with amateur short sellers entering trades at the wrong time.
The stock broke the 200-day exponential moving average (EMA) in March 2017 and tested that level for more than six months before turning sharply lower. Two rally waves have failed at that barrier, indicating that short sellers may wish to reload positions when a bounce approaches the $58 to $60 price zone. A rally or bounce will need to remount broken support at $56 to reach that level, indicating that it could unfold as a major short squeeze. (See also: Papa John's Adopts Poison Pill vs. Founder: WSJ.)
The Bottom Line
Papa John's stock has hit a two-year low in reaction to the founder's departure and could lose significant market share in coming years. As a result, selling rallies and squeezes could generate opportune profits. (For additional reading, check out: Papa John's and Wendy's Held Merger Talks: WSJ.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>