Some traders shy away from stocks that have just hit an all-time new high. Personally, I am attracted to these stocks. They frequently represent low-risk/high-reward trading opportunities.
Stocks hitting new highs often continue to advance because there isn't any technical resistance in sight. That's why I'm excited about today's trade.
After announcing strong fourth-quarter and full-year results on February 28th, shares of Domino's Pizza (NYSE: DPZ) shot up 14%, hitting an all-time high, near $40. In the process, the stock broke out of a multi-month holding pattern and formed a highly bullish flag formation. The stock has recently broken out of the top end ("flagpole") of a flag formation -- and has hit a series of new highs.
Fueling Domino's growth is a change in its dough and sauce recipes, followed by an aggressive advertising campaign that promises "better tasting pizza." Domino's has also improved its online ordering system, while maintaining competitive prices.
Also driving sales is the company's growing store numbers. Currently, Dominos operates nearly ten thousand franchised and company-owned stores in the U.S. The pizza retailer also operates in over 70 countries worldwide. Despite this strong international presence, it sees further international expansion as a primary driver of future growth. The company plans to open between 350 and 450 stores in coming years, up from previous projections of 250 to 300 units. Given that Domino's will franchise many of these stores, operating and start-up costs should be kept to a minimum, but corporate profits will likely rise.
Traders appear to favor the company's plans. Shares are on a tear and show no sign of slowing down.
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As the daily chart shows, from mid-October through late February Domino's traded in a rectangular range between support, near $30.30 and resistance around $35.30. During most of February, the stock hovered around the flat 50-day moving average, which intersected near $33.
However, upon announcing stellar fourth-quarter and full-year results on February 28th, the stock gapped up from its 50-day moving average, bullishly breaking the multi-month rectangular holding pattern.
In a single day, shares skyrocketed nearly $5.40, on very heavy volume, creating a large bullish candle. This candle marked the "flag pole" of a highly bullish technical pattern known as a flag formation. The flag's pennant formed over the ensuing trading days, as the stock cooled and consolidated around the $38 range.
Flag formations usually resolve bullishly. Shares now appear to be heating up and are re-testing their recent all-time $39.92 high. A small shelf of resistance has formed here; however, if the stock can break out past this level, it could go much higher.
The bullish technical outlook is supported by strong fundamentals.
Fourth-quarter revenue rose 4.5% to $501.7 million, from $480 million in the year-earlier period. The increase was driven by strong pizza demand in the domestic and internationals markets.
Due to increased demand, full 2011 year revenue edged up 5.2% to $1.7 billion, from $1.6 billion last year.
Analysts project full-year 2012 revenue will increase a further 2.9% and will jump 4.4%, to $1.8 billion by full-year 2013.
For the quarter and full-year, same-store-sales -- an important metric of retail growth -- increased both domestically and internationally, making the 72nd quarter and 18th full year of consecutive quarterly growth! Due to higher store traffic, fourth-quarter domestic same-store-sales rose 6.8%, while international comps increased 4.7%. Over the full-year, domestic comps rose 3.5%, while international increased 6.8%.
For the full 2012 year, the pizza chain expects domestic same-store sales will increase 1% to 3%, with international comps projected to rise 3% to 6%.
Due to same-store-sales and margin expansion, fourth-quarter earnings rose 30% to $0.52, from $0.40 in the comparable year-ago quarter.
Full-year earnings surged 18% to $1.71 per share, from $1.45 a year ago.
Through continued international expansion, analysts project full-year 2012 earnings will jump 15.2%, to $1.97 and will increase an additional 13.7% to $2.24 by full-year 2013.
Given this bullish fundamental outlook, supported by currently bullish techincals, I plan to go long on the pizza company.
Risks to consider: Domino's stock appears to be completing a highly bullish technical pattern known as a flag formation. Flags typically present explosive short-term trading opportunities. However, if the stock cannot decisively break out of the pattern in a 15 to-20 trading period, the flag formation could fail. Traders then risk buying the stock at the top of an all-time high.
As such, I will place a buy-on-stop order at $40.01, just above current resistance and the psychological resistance mark of $40. This means if the stock does not hit or go above $40.01, I will not enter a position.
If DPZ can penetrate $40, I think it should move to the mid-$40's and am setting a target of $47.31. My stop-loss is $33.99, which would represent a break below support and the current intersection of the 50-day moving average.At current levels, the risk reward ratio is 1.36:1.
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