Tuesday, May 27, 2008

a bearish idea

investors' focus this week will remain on surging food and energy costs and their impact on the economy. earnings from several retailers, including cost and shld, will provide clues about the health of consumer spending. the numbers are likely to indicate a continued slowdown in sales. with this theme in place, i'd like to offer an idea: a bearish position in cec -- the operator of the Chuck E. Cheese chain of family restaurants.

shares of cec hit a 10-month high of $39 on 5/12, giving the stock a year-to-date gain of almost 50% and making it one of best performers in the casual dining sector. since then, however, the stock has rolled over, closing at $33.60 on friday. in addition, for those that believe, the chart appears to have put in top.

cec has done a great job managing costs as well as its concept, which is one-stop family dining and kids' entertainment. but if food costs continue to rise and discretionary consumer spending declines, i expect this chain's sales will suffer during the summer. low-priced restaurants such as rrgb and jbx have recently reported disappointing earnings, and both have seen their shares tumble.

because cec doesn't report earnings again until late july, the price deterioration might take some time to play out. so i'm looking at buying longer-dated, out-of-the-money options to create a low-cost bearish position.

one way to do this would be to buy to open 20 sept $30 puts at $1.50 a contract.

i think the shares may hit $24 a share. use a close above $38 as a stop for exiting the position.

disclosure: DO YOUR OWN DD!! also - long shld puts

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