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An Analyst Note Draws Attention to a Potential 77% Gain

An Analyst Note Draws Attention to a Potential 77% Gain

Wingstop Inc. (NASDAQ: WING) is a franchisor and operator of restaurants that specializes in cooked-to-order, hand-sauced and tossed chicken wings. It’s the kind of company many traders can overlook.

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  • It is a casual chicken wings-focused restaurant chain with various concepts, which include wings as add-on menu items or focus on wings in a bar or sports-centric setting. The company offers its guests 11 flavors on bone-in and boneless chicken wings paired with hand-cut, seasoned fries and sides.

    The flavors include Atomic, Mango Habanero, Cajun, Original Hot, Louisiana Rub, Mild, Hickory Smoked BBQ, Lemon Pepper, Garlic Parmesan, Hawaiian and Teriyaki. It offers various order options, including eat-in, to go, individual, combo meals and family packs.

    WING also maintains Website hosting, and manages the development and maintenance of the mobile Wingstop application for its restaurants. It markets Wingstop products, services and restaurants through the Website, www.wingstop.com.

    Benzinga recently reported,

     “Wingstop Inc is scheduled to host an Investor Day presentation on Jan. 16 and management is likely to detail multiple catalysts that will translate to outperformance versus current expectations, according to Wedbush.

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  • This news comes as Nick Setyan upgraded Wingstop’s stock from Neutral to Outperform with a price target lifted from $88 to $105.

    Wingstop is sitting in an enviable position in the restaurant sector given its direct exposure to the growing popularity of chicken items and a focus on delivery, Setyan wrote in the note. This should help sustain same-store sales growth at industry-leading levels in 2020 and beyond.

    In fact, Setyan thinks delivery alone could contribute more than 6% of incremental same-store sales in 2020 if management continues to focus on effective marketing programs.

    A Wedbush survey on all things delivery related found Wingstop’s usage and awareness has room to improve versus its peers which implies a potential for sustained delivery growth.

    The company’s favorable positioning is also backed by three specific initiatives, including adding new delivery partners, growth in marketing spend and potential for increased throughput opportunities which were implemented in the U.K. market and now being tested in the domestic market.

    The stock price has been volatile recently.

    WING daily chart

    The volatility appears to be comping as the stock develops support after pulling back.

    WING weekly chart

    A push to old highs could be expected based on the chart pattern.

    A Trade for Short Term Bulls

    As with the ownership of any stock, buying WING could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

    To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

    Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

    To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

    This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

    bull call spread

    Source: The Options Industry Council

    Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

    This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

    A Specific Trade for WING

    Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

    When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

    For WING, the February 21 options allow a trader to gain exposure to the stock.

    A February 21 $90 call option can be bought for about $3.60 and the February 21 $95 call could be sold for about $1.80. This trade would cost $1.80 to open, or $180 since each contract covers 100 shares of stock.

    The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

    In this trade, the maximum loss would be equal to the amount spent to open the trade, or $180.

    The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

    For this trade in WING the maximum gain is $3.20 ($95 – $90= $5; $5 – $1.80 = $3.20). This represents $320 per contract since each contract covers 100 shares.

    Most brokers will require minimum trading capital equal to the risk on the trade, or $180 to open this trade.

    That is a potential gain of about 77% in WING, based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.

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