The positive potential of Jack in the Box

While they managed to capture the initial wave of market optimism that swept through stocks in November and December, shares of Jack in the Box Inc. NASDAQ: JACK I’ve been on the sidelines since January. They are now down more than 10% from the peak of that rally as the stock’s multi-year downtrend tries to assert itself again.

It will disappoint investors who have been watching McDonald’s Company NYSE: MCD AND Chipotle Mexican Grill Inc. New York Stock Exchange: CMG rise to new all-time highs in recent weeks. For context, Jack in the Box shares are currently back trading at the same level as 2014.

Recent headwinds

Much of the negative pressure on stocks comes from weaker-than-expected growth signals, as reported in the company’s earnings report last month.

It missed analysts’ expectations for its earnings, while revenue contracted more than 7% year-on-year. When so many stocks out there are experiencing the opposite right now, it’s understandable that many investors want to throw in the towel.

But according to a team of analysts, now is not the time to abandon Jack in the Box; if anything it’s time to start getting excited. That was the sentiment of the Wedbush team, who just yesterday upgraded their rating on Jack in the Box shares from “neutral” to “outperform,” while raising their price target to $88.

The team believes the market has an overly pessimistic view of the company’s growth prospects, and the recent divergence in stock performance relative to the rest of the market has opened up a solid entry opportunity. Their price target increase, with the suggested upside of 20%, is just a testament to this. They are also bullish on the company’s valuation relative to its peers through a “45% discount to its franchised quick-service restaurant peers,” which also materializes in the company’s price-to-earnings (PE) ratio. At just 13, it compares very favorably to McDonald’s 24 and Chipotle’s 62.

Considering a position

It’s been an interesting position, but they’re not the first to take a bullish stance following the company’s most recent results.

Following last month’s release, the Oppenheimer team reiterated its “outperform” rating on Jack in the Box stock and its $98 price target. As shares have fallen considerably in the weeks since, with the current expected upside around 30%, that target has only become more attractive.

Jack in the Box has an unfortunate history of underperforming its competitors. The fact that its shares are trading at the same prices as a decade ago isn’t exactly inspiring, nor is the fact that the company wasn’t even able to meet analysts’ expectations in its latest earnings report.

Rate an entry

But if yesterday’s Wedbush report is to be believed, the recent period of soft trading has become too much and Jack in the Box stock is due for a rebound. Investors should look for stocks to continue consolidating around $70 as they look to form a short-term uptrend from last month’s low of around $67.

Technically, the fact that they have managed to stay afloat above $72 for the past two weeks is bullish, as it is forming a solid support line from which to move northward. Maintaining this level will be key to having any hope of staging a comeback in the coming weeks and reaching Wedbush’s target of $88 or even Oppenheimer’s target of $98.

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