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A PNRA Buying Opportunity

09/24/12 08:37:34 AM
by Billy Williams

Most consumers are avoiding big-ticket items these days but are still willing to buy a good meal, and Panera is more than willing to provide that.

Security:   PNRA
Position:   Buy

Consumer confidence is still down despite the up market. With unemployment still high, many consumers are unwilling to purchase big-ticket items, but many are still willing to buy a good meal at companies like Panera Bread (PNRA). Panera has more than 1,500 bakery-style cafes that offer an upscale menu of sandwiches, breads, pastries, soups, and salads at affordable prices while providing a social and pleasing dining experience for its patrons.

The company boasts a solid balance sheet and strong performance with the last seven quarters of reported earnings coming ahead of estimates, with the last quarter slipping slightly by one percentage point, coming in at 27%, but well above the 25% minimum for stocks with growth and momentum potential. Overall, the earnings per share growth rate is at an impressive 26%, and annual earnings estimates for 2012 are on track to the 25% and should have no problem of hitting the 2013 annual earnings estimates of 19%. See Figure 1.

FIGURE 1: PNRA. Panera has been on a steady uptrend since the 2009 bull market, but you need a skilled eye to spot the first-stage base resets.
Graphic provided by:
The impressive string of earnings reported give the company an earning stability score of 4 by "Investor's Business Daily," which effectively says that from a scoring of 1 to 99, the lower the score the better. That said, the current score of 4 shows a company that knows how to run its business on a large scale as well as give its customers the quality of service that keeps them coming back.

The rest of the stock's fundamental criteria rounds out with a very healthy 22% return on equity, well above the 17% minimum needed to be strong stock candidate for investment, a composite rating of 97, and a rising number of institutional investors taking a stake in the stock to the tune of 496 funds owning shares.

At a glance, the technical criteria looks good, but a closer look at the patterns forming show a stock that has been back & forth in its price action, but given the nature of the market lately, that is understandable.

FIGURE 2: CUP & HANDLE. The recent breakout from a cup & handle pattern gives you a buying opportunity within 5% of its buy point from $164.10 to $172.30.
Graphic provided by:
The stock has more than tripled since the bull run of 2009, rising from around $50 a share to more than $172 currently. Recently, the stock has reset its first-stage base pattern several times, starting on July 28, 2011, when price undercut the intraday low on June 28, 2011. From there, a new base pattern formed up till it gapped up hard near the end of October 2011 and formed a flat-base pattern and signaled an entry on November 28, 2011, at $140.03.

Price traded higher but then slipped down into the flat-base pattern from which it came, narrowly coming within the standard 8% stop-loss point before resuming its upward move. After hitting a new high of just under $165 a share on March 27, 2012, PNRA began a slow decline and, over time, formed a new cup & handle pattern. See Figure 2.

Here is where things become very nuanced; since price never rose 20% from its buy point of $140.03 from the previous flat-base pattern, also a first-stage base pattern at the time, the new cup & handle pattern became the de facto first-stage pattern upon its formation. This dynamic became a base-on-base pattern with the reset at the new cup & handle formation.

As the handle portion of the pattern formed, the trading was noted for having low volume, which is what you want to see on these types of patterns -- low volume on the handle portion until price breaks out where you want to see massive volume catapult the stock higher. And on September 12, 2012, you saw price do just that as it triggered a buy at $164.10 on volume coming in at 198% of normal trade volume.

The stock is continuing higher and as long as the market has its legs underneath it, the bulls have the upper hand. After a breakout from a first-stage base, there is a buying opportunity of 5% from its buy point, which means that buying PNRA within a price range of $164.10 to $172.30 is in effect.

Wait for a pullback and buy into it or catch it as it trades higher through its new price high. But as always, use stops and control your risk. Remember, professionals know their exits before they ever make their entries.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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