Last Tuesday, the price of Wendy’s shares hit an all-time high of $29.46 a share, pushed by traders on the Reddit message board WallStreetBets buying significant volumes of out-of-the-money options.
The jump in stock price was followed by a sharp sell-off as longer-term investors took the opportunity to offload their Wendy’s holdings. The stock is currently close to where it was before the single-day frenzy.
So what’s next for Wendy’s? Join us as we take a closer look at the business’s fundamentals and the stock’s current technical setup.
Wendy’s stock news
Messages about a potential gamma squeeze play started to circulate on the WSB Reddit forum last Monday.
In a gamma squeeze, brokerage firms buy a derivative’s underlying asset to hedge their position in case those derivatives end up expiring in the money (ITM).
Last Monday, the implied volatility (IV rank) of Wendy’s stock was so low that options were cheap, meaning brokers expected little to no fluctuation in the fast food chain’s share price. But once the Reddit army began acquiring ATM and OTM options, brokers were forced to buy the underlying asset to cover their exposures.
As a result the stock price went up almost 26% in a single session that saw trading volumes 44 times higher than WEN’s 10-day average.
That’s what happens when there’s a coordinated effort to pump a stock. A sharp downturn wasn’t unexpected – investors saw the price of their options increase dramatically and offloaded their positions.
Brokers had to follow through with this movement as their big exposure to the stock was now unjustified. So what's next for Wendy’s stock?
Wendy’s (WEN) stock forecast
A prudent investor would try to estimate the fair value of Wendy’s shares to see if there’s an opportunity to buy the stock at its current price. A short-term trader might also look at the stock’s technical setup to see if there’s an opportunity for quicker gains.
It‘s important to note that Wendy’s 30-day implied volatility sits at 54.8% after peaking on Tuesday at around 160%. The current implied volatility of 94.8 means that for 94.8% of the past year, the stock’s implied volatility was below current levels.
The 30-day implied volatility of the stock before Tuesday was 25%.
If the Reddit-triggered options-buying frenzy is over, chances are that volatility will continue to move lower in the following days – and so too will the premium paid for a call option.
In terms of fundamentals, Wendy’s sales have been declining over the past decade, moving from $2.3bn in 2012 to $1.4bn last year.
The market expects Wendy’s non-GAAP earnings per share (EPS) to be $0.74 a share by the end of 2021 – a forward P/E ratio of 32.6, which is quite high for a business whose sales and profitability have been declining for years.
From a fundamental perspective, Wendy’s seems to be an overvalued company with poor fundamentals.
From a technical perspective, even though this week’s action pushed Wendy’s shares above a long-dated trend line resistance, the price settled below those levels as a result of the selling that was seen from Wednesday to Friday.
Nothing has really changed for the company, at least not from a fundamental or technical perspective, and the current outlook for Wendy’s stock appears bearish. Many long-term holders may have exited their positions, creating room for a short-term downside as a result of higher supply.
Wendy’s stock: buy, sell, or hold?
According to Seeking Alpha, 13 out of the 27 analysts covering WEN are bullish on the stock, while the remaining 14 are neutral. The consensus price target for WEN stands at $25.82 per share – a 7% upside potential based on Friday’s closing price.
Bullish attitudes towards the stock prevail, although there are no longer sellers in the group – something to note when considering Wendy’s stock forecast for 2021, 2025 or 2030.
According to TipRanks’ latest Wendy’s stock prediction, based on 21 analysts offering year-long price targets, the average price target for WEN is $26.14, which represents a 8.29% increase from the last price of $24.14.
The highest analysts’ price target for the next 12 months is $30.00, while the lowest expected price is $23.00. Price targets are conservative, and analysts rank the stock as a Moderate Buy.
Frequently Asked Questions (FAQ)
Based on the business’s poor fundamentals and current technical setup, the outlook for Wendy’s shares remains bearish. However, TipRanks and other forecast agencies hold moderately bullish views on Wendy’s.
Nobody can predict where the price of a stock will land with 100% certainty. The current technical setup doesn’t appear to be too bullish as the stock shrugged off most of its Reddit-prompted gains to close the week below that weekly long-dated resistance.
A rejection of that price level seems plausible, which could result in a downturn for WEN.
Wendy’s offers a 1.66% dividend yield each quarter. This corresponds to a $0.10 dividend declared during the first quarter of its 2021 fiscal year. The company expects to either grow or maintain its dividend payments in the following quarters.