Relative Strength Winners & Losers: PNRA, DPZ, KOG, GLW, RIG

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December 06, 2011 at 08:19 AM

BY Dennis Hobein - Contributor, Stock Traders Daily

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One of the most efficient, and oftentimes effective, ways to generate trading ideas is to simply look at what stocks are outperforming and underperforming the broader markets. In other words, using relative strength – which is a measure of price trend that indicates how a stock is performing relative to other stocks – can be a quick go-to strategy for traders looking to find “what has been working.” With this in mind, in today’s article we wanted to point out a few names that have exhibited notable strength and weakness, and provide some context around why the particular stock is acting the way it is.

Upside “Baked In” For PNRA
One of the more unlikely stocks that popped up on the screen was Panera Bread (Nasdaq: PNRA), the bakery-café operator that owns and franchises nearly 1,500 restaurants throughout the U.S. In this tough economy, fast-food chains have been performing relatively well -- despite rising commodity prices -- as consumers trade down to lower-cost meals. But, PNRA is priced above most fast food options, and it has less wiggle room to raise prices to offset those increasing costs. Nevertheless, the stock has surged some ~36% since the beginning of October, bolstered by a “beat and raise” quarter back on October 25. Its performance was driven by accelerating same store sales growth of +6.0% due partially to the launch of its loyalty program and new menu items.

While PNRA’s surge has been impressive, one has to wonder if there is any more gas in the tank considering its full valuation. Shares are currently trading with a forward P/E of 26x and a PEG of 1.4x. The stock is also trading near all-time highs, so a pull-back seems likely in the near-term.

DPZ Is Delivering
Another restaurant stock that has been on fire of late is Domino’s Pizza (NYSE: DPZ), up 34% since early October, threatening all-time highs. The stock’s strength is also attributable to an impressive upside Q3 report. Its operating margin ticked up to 27.5% from 27.1% despite higher commodity prices, indicating that it has been able to pass some of these costs over to customers. The question now for traders is, is there any upside remaining in this stock? Its valuation isn’t overly concerning at this point, with a P/S of 1.3x and forward P/E of 17.8x, and the stock just recently broke higher following a consolidation period in the $31-$33 area. But, DPZ isn’t exactly a “high-growth” name – analysts are projecting 14% EPS growth next year – so it may be difficult to justify another substantial leg higher from here. Its all-time of $35.67 will be a price level to watch in upcoming sessions.

Discovery Big Gains With KOG
Oil & gas stocks have been clear outperformers recently and one stock standing out has been Kodiak Oil & Gas (NYSEL KOG), which broke out to all-time highs in early November. Its assets are located primarily in the Bakken Shale area in North Dakota and Montana, an area in which it has made nearly $240 million in acquisitions over the past few years. This has significantly ramped up its total reserves and production volumes, and combined with a rebound in crude oil prices, its EPS soared by 311% last quarter. KOG continues to look for property acquisition candidates, and has recently increased the size of a senior note offering to $650 million in order to fund the purchase of more acreage. The Street is forecasting huge growth for the company next year, estimating EPS & revenue growth of 276% and 359%, respectively.

A Pair of Underachievers
Two stocks on the other end of the spectrum are Corning (NYSE: GLW) and Transocean (NYSE: RIG). GLW has been getting hit after it lowered its Q4 LCD glass volume guidance and commented that Q4 LCD price declines are expected to be more significant than originally planned. As most people realize, LCD TV prices have been heavily discounted, pressuring glass prices. GLW has some support around $13-$13.50, but more notable support resides around the $10 level. Following the news of a leakage at an oil well in Brazil (in which RIG is the drilling contractor) and the announcement of a senior notes offering, shares have been under severe pressure. The sell-off, however, has put shares at a key support level at $45, so those looking to short the stock from here may want to see if that level holds or whether it rebounds off that level.

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