Papa John's Stock Bottoming Out After Brutal Downtrend

Papa John's International, Inc. (PZZA) shares rose more than 7% on Tuesday after the company announced that former Arby's President Rob Lynch will take over as CEO, effective immediately. Long-time company executive Steve Ritchie is stepping down after acting as interim chief since the acrimonious departure of founder and namesake John Schnatter, who remains the company's largest shareholder.

Schnatter was forced to step down in July 2018 after it was reported he used a racial slur during a phone call with a marketing agency. Fallout from the comment and his prior criticism of NFL players continues to plague the pizza chain, which reported a 7.1% year-over-year revenue decline during early August's second quarter release. Papa John's hopes to improve its standing with the African American community and others outraged by his behavior when a new ad campaign featuring Shaquille O'Neal launches this fall.

PZZA Long-Term Chart (1994 – 2019)

The company came public at a split-adjusted $2.00 in 1993 and entered an immediate uptrend that gathered strength into the 1996 high at $9.17. It then eased into a shallow channel, posting meager gains into the 1999 peak at $11.85, which marked the highest high for the next six years. A 2000 channel breakdown found a trading floor under $5.00 a few months later, ahead of a 2001 test that posted a small-scale double bottom reversal.

A shallow recovery wave completed a round trip into the 1999 high in 2005, triggering an immediate breakout that attracted strong buying interest into 2006, when the uptrend stalled in the upper teens. The stock tested breakout support and broke down during the 2008 economic collapse, settling less than two points above the 2001 low before turning higher in a weak bounce that ended in the mid-teens in the second quarter of 2009.

The stock finally cleared that level and the 2006 peak in 2011, entering the strongest uptrend so far this century. It posted gains in excess of 400% into December 2016's all-time high at $90.49 and turned lower once again, with heavy competition eating into revenues. Schnatter's NFL comments triggered a breakdown at $70 in the fourth quarter of 2017, followed by a decline to a four-year low in the upper $30s after the 2018 racial slur.

The secondary downdraft completed a 100% retracement into the 2014 low, filling out a bearish pattern that will be hard to overcome. Even so, price action has carved a base at new support for the past year, with successful February and August retests completing the outline of a triple bottom that needs a buying spike into the upper $50s to confirm a new uptrend. The monthly stochastics oscillator predicts that it won't be an easy task, crossing into a sell cycle in June.  

PZZA Short-Term Chart (2016 – 2019)

Lower highs since January 2018 place declining trendline resistance at $52, still below tough resistance at the 50-month exponential moving average (EMA), which was violated in 2017. As a result, it isn't wise to look for rapid progress through the $50s, even if buying interest picks up in the coming weeks. However, the stock is trading above the 200-day EMA for the first time since June, highlighting renewed optimism that may eventually support a recovery wave into the low $70s.

The on-balance volume (OBV) accumulation-distribution indicator topped out in 2015, nearly 18 months before the 2016 price peak, and entered a distribution phase that carved a vertical selling climax in August 2018. The immediate bounce to OBV resistance (black line) supports a bottoming call in the 18-month downtrend, but price action still hasn't completed the preliminary work needed to support much higher prices.

The Bottom Line

Papa John's stock has ended a ferocious downtrend, but major overhead supply is likely to limit gains into the new decade.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.