Domino’s Falling: Pizza-Maker Delivers Glob of Stale Dough (DPZ)

Just as garlic is headed toward commoditization, so, too, we believe, is pizza.

And that’s why we’re highlighting international grease merchants Domino’s Pizza today (NYSE:DPZ), a company that prides itself on peddling cheap goods to those who care little for their health.

Domino’s sells more pizza globally via their 17,000 outlets than anyone outside Vatican City, yet still their stock is in trouble.

Why?

Well, let’s consider the fundamentals –

• To start, the stock trades at a cheesy 32.29x last year’s earnings,
• Offers no P/B, and
• Yields 0.83% annually.

Not much to chew on there; so why did the stock see such a strong first half in 2020?

I didn’t order this!

Much of the guff surrounding the rise was Batflu related.  That is, fast-food delivery businesses were making a genuine killing at that time – including a number of exchange-listed pizza slingers – and Domino’s appears to have piggy-backed on their success.

That said, DPZ’s earnings were crusty by comparison.  Thin, you might say.

And a look at the daily chart reveals just how overdone things are at present –

The stock has been tracing out a very long top and appears ready for a break.

To wit –

1. Both RSI and MACD are both sub-waterline bearish (in green), meaning the selling has begun and awaits only a catalyst to set it moving at speed.
2. Two of the stock’s four principal moving averages have rolled over, placing a cap on the stock at $392 (and falling).
3. The catalyst mentioned above (in #1) could well be a break below the descending triangle support at $367 (in red).  Should that line be breached, we’d likely see an onslaught of sell orders.  Incidentally, that level also represents support from the 274 DMA.
4. Below that mark, next support arrives at the 411 DMA, currently at $334 and rising (in mauve).

Domino’s delivers Q4 numbers on February 25^th, but we’ve a hunch the break may come earlier.

So we’re playing her against the broader market using the SPDR S&P 500 ETF (NYSE:SPY).

Take a look at the two pinned against each other for the last year –

Clearly, DPZ has not kept up with moves in the broader market over the last three months.

Investors, you see, can occasionally recognize weakness.

We’re playing it like this –

A Jew and His Gold recommends you consider selling the SPY March 19^th 375/385 CALL spread for $6.63 (15.35/8.72) and using the funds to purchase the DPZ March 19^th 380/350 PUT spread for $14.40 (23.50/9.10).  Total debit on the trade is $8.23.

Rationale:

With a decline expected for DPZ, we’re looking to maximize our profits with a PUT spread while minimizing our costs.

The SPY CALL spread offers much fatter premiums than similar DPZ spreads, so we’re using it to offset the purchase.  SPY is also in the midst of a topping pattern, so we feel comfortable selling the spread.

Maximum loss on the trade is $18.23 (difference between the CALL strikes plus initial debit).

Maximum gain on the trade is $21.77. (difference between the PUT strikes less initial debit).

Many happy returns,

Matt McAbby

Follow @HughLOHaynew