This 6x Overvalued Stock Could Hand Us A 40.6% Gain
As I mentioned at the beginning of last week, the market has transformed from a straight shot moneymaking bull market machine into more of a runaway train headed for untested track in near-zero visibility conditions. Take what you know and throw it — along with most of your logic — out the window.
The best way to win now is to laser in on very unique stocks that are either undervalued or overvalued while trying to steer clear of unpredictable geopolitical policy shifts. (Honestly, it’s starting to feel like these shifts are occurring with higher frequency than the Twitter messages triggering them.)
In an effort to do just that, I searched for a stock that shouldn’t be terribly affected by tariffs… or walls… taxes… or the USPS.
As I scoured the markets for an “insulated play,” I landed on pizza. But unlike the rocket my Profit Amplifier subscribers and I rode in February with Domino’s Pizza (NYSE: DPZ) — which gave us a 22.5% return in only seven days — this new play is focused on a recent loser that is still extremely overvalued.
This is a pizza company that just lost its title as “the official pizza of the NFL” to Pizza Hut… and I think it’s likely we’ll see it tumble back to its recent lows.
Papa John’s Is Going Cold
Papa John’s International (NASDAQ: PZZA) is a unique franchise brand with humble beginnings. The company has grown tremendously since it started out in the mid-1980s and now operates more than 5,000 locations in 45 countries and territories around the world. Papa John’s focus has long been on using fresh, less-processed ingredients, with founder John Schnatter making you feel all warm and fuzzy inside.
Except things haven’t been so warm and fuzzy lately… Schnatter stepped down as CEO in December after blaming NFL protests for his slumping pizza sales.
And unfortunately for Papa John’s, its whole “fresh” thing has been adopted by just about every restaurant out there and marketed aggressively by all its peers. On Wall Street, it’s not “fresh” that matters, only rising profits and sales — and that’s the problem.
According to analysts, revenues are expected to fall 0.9% in 2018, which will equate to a 6% earnings drop.
Shares of PZZA are already trading around the very optimistic consensus estimate of $62.50 set by analysts — that tells me it has likely topped out. Of the seven who cover the stock, four rate it a “hold” — which doesn’t exactly convince me of their overwhelming confidence.
The biggest key to this trade is the stock’s very rich valuation of 25 times forward earnings (which is actually higher than the trailing multiple because earnings are expected to decline this year over last).
Also, analysts are only predicting earnings growth of 3.9% over the next five years. When we take that data and incorporate it into a PEG ratio — which compares a stock’s price-to-earnings (P/E) ratio to expected earnings growth — we come up with a value of 6.3. Let me now remind you that a stock is considered fairly valued when its PEG ratio is equal to 1. Papa John’s is valued at more than six times its “fair valued” price.
That’s outrageous. Especially for a company that no longer carries any premium status… like being the “official pizza of the NFL,” for instance.
This is a stock that looks primed to fall, based on its overvaluation alone. But Papa John’s enjoyed some of its best growth years during its eight-year partnership with the NFL, and I think that the company’s earnings and revenue results will be even worse than expected as it loses the NFL’s media backing and as competitors with better offerings push to take over market share.
With Papa John himself out as CEO and no more NFL support, I think the chances for a decline to technical support at $56.50 is much more likely than a continued rally to $65 or more.
Using put options, we can turn a 9.7% decline to that level into a 40.6% profit in a few short months. That’s a shocking 140% annualized.
What’s more is that we’ve already seen this exact put option trade above this target price twice in the past two months, which gives me confidence that neither traders nor market makers will get in the way of our success.
If this still sounds risky to you, maybe because you’re new to options trading, know that this trade breaks even if PZZA hits $60.40. That’s just 3.5% below recent prices, a move that seems inevitable as the market catches on to the stock’s outrageous valuation.
How You Can Get In On This Trade
It wouldn’t be fair to my premium Profit Amplifier subscribers to reveal the specifics of this options trade in this article. But my proven strategy could be just what you need to make more on your trades than you thought possible.
While the rest of the crowd is simply buying stocks and hoping for the best, my subscribers and I have spent years “raiding” the market with our simple options trades, taking more than our fair share of gains.
I’m talking about returns of 31%, 35%, and more — all in a matter of weeks rather than months or years. In fact, we just closed a trade on TripAdvisor (NASDAQ: TRIP) for a clean 26.3% in just 10 days.
Bottom line, my stock market raiding technique is the best way to increase your returns while preserving capital and reducing risk. Of course, that’s only if it’s done correctly.
That’s why I created a special report that will walk you through the steps I take when going on market raids, which should help you avoid the costly mistakes many new traders experience. If you’d like to make trades like the one I described today — or even potentially make 80% when a stock only moves 8% — go here.