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A potential earnings short-squeeze trade in the restaurants complex is
Sonic(SONC - Get Report), which is set to release numbers on Wednesday after the market close. This company operates and franchises chain of drive-in restaurants (Sonic Drive-Ins) in the U.S. Wall Street analysts, on average, expect Sonic to report revenue of $681.10 million on earnings of 13 cents per share.
Sterne Agee has upgraded shares of Sonic this morning from a neutral to a buy rating with an $11 price target. Sterne Agree comments, "The primary catalyst for our upgrade is that we believe the recent improvements in SSS is likely sustainable over the next several quarters given core product quality improvements, menu innovation and new advertising. In addition, we view the roll-out of a new POS system and the development of a new lower-cost prototype as longer-term positives. We also note an attractive FCF yield of 13%."
The current short interest as a percentage of the float for Sonic is rather high at 7.3%. That means that out of the 85.59 million shares in the tradable float, 3.26 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 21.4%, or by about 729,000 shares.
From a technical perspective, SONC is currently trading above both its 50-day and 200-day
moving averages, which is bullish. This stock formed a double bottom in April to mid-May at around $6.84 to $6.88 a share. After forming that bottom, shares of SONC have soared and trended up toward a recent high of $8.95 a share. During that move, shares of SONC have consistently made higher lows and higher highs, which is bullish technical price action. That move has now pushed SONC within range of a near-term breakout trade.
If you're in the bull camp on SONC, I would look for long-biased trades if after earnings it triggers a break out above some past overhead resistance at $9.82 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 721,352 shares. If we get that action, then SONC could re-test and possibly take out its 52-week high of $11.34 a share if the bulls gain full control of this stock post-earnings.
I would simply avoid SONC or look for short-biased trades after earnings the stock fails to trigger that breakout, and then moves below some near-term support at $8.50 a share with high-volume. If we get that action, then SONC should setup to re-test its next significant
support levels at $7.91 to $7.73 a share if the bears smack this stock lower post-earnings.