Papa John's P/E is undoubtedly on the high side compared to most restaurants. PZZA has a 30 P/E, while most of its competitors are in the 15-25 range. On the other hand, McDonald's runs around a 37 and Starbuck's has an 87 P/E.
I'm somewhat less concerned with the P/E than I am about price resistance. Looking at a one-year chart, you see that whenever PZZA gets to around $45, it makes a top. It can't manage to go and stay above the $45 top. On the down-side $35 has been a demonstrated support level.
<Is this thing going down?> Yes, of course it will go down and, of course, it will go up. We can't predict day-to-day price moves and we never buy at the low and sell at the high, except fortuitously. It's more productive to think of reward/risk ratios. (Besides, a ratio makes it easier to compare one stock to another. Buy the stock with the best reward/risk ratio.)
PZZA closed Friday just about $42 1/2. Therefore, in the present range-bound cycles, there's $2 1/2 potential reward and $7 1/2 potential risk. The reward risk ratio is 1/3.
Buy PZZA now? It doesn't look like a good bet. Sell PZZA now? Perhaps. That depends on your own proclivity to take risk. My preference is to set markers at 10, 15, 85, and 90% levels on a cycle from low to high. If a stock falls below the 10 or 15% line, I'd mark it as a potential buy once it crosses the same line in an upward direction. When it goes above the 85 or 90% line, it's a sell candidate if it falls below the respective marker. I say 'candidate' because I don't use the criterion as a mechanical system and there are generally other factors to take into consideration. But it IS a starting point. Note that a high P/E doesn't even come into this decision as a primary factor. It might become an 'other' factor (but generally not).
Now what about PZZA? Buy or Sell? For me, it's not a Buy yet. Too close to resistance with the likelihood of a downturn. If I were long, would I sell? Possibly, but the direction of the last few days is upward. I'd wait for the 85% marker (43 1/2) and use that as a mental stop first. If PZZA turns down before I can sell? I think I'd accept the increased risk, put it back in the 'Hold' column and just wait it out. It might be only a few days.
Where would I want to buy for (almost) sure? 1) Coming back out of a low -- crossing upward out of a $36 1/2 level. or 2) Breaking to new highs. I'd watch $45. If PZZA can top $45 and STAY there for a couple of days or if it breaks above $47, then I'm a buyer. Above $47 there are no buyers within the past year who are losing money. There's no psychological motivation to sell - only the eagerness to watch for new highs. Ultimately, of course, there will be a new peak and once that happens, then you struggle with your decision to take profit or to wait for resumption of the up-trend again.
Probably I haven't directly answered the questions you asked, but I hope I may have added a dimension to the way you look at a stock. What's the reward; what's the risk? |
