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Potbelly's sinking shares still can't find the bottom

The Exchange

For the fourth consecutive day, sandwich maker Potbelly (PBPB) was hitting a new trading low, continuing the downturn that's plagued the stock since its debut last fall.

On Friday afternoon it was down 1.4% at $18.24, and earlier it fell as far as $18.19. On the market only since October, the Chicago-based chain has been terrible for anyone long the shares for any length of time. It's largely dribbled lower, rather than suffering a few gigantic moves, but it has been entirely consistent in its direction, as the chart below indicates.

It's had only one positive session in the past two weeks. That steady decline has helped lower Potbelly's forward earnings multiple to 50.6 from a high of 88.3, according to FactSet data, but it still leaves it well above the mid-20s average among a group of 42 publicly traded restaurants tracked.

Even after the pullback, it maintains easily one of the highest price-to-earnings ratios in the group. While on its own that's not a terrible thing if growth supports it, Potbelly's stated goals haven't kept enough believers interested in the story.

Potbelly is projecting 10% store growth and 20% or higher yearly profit increases, and for this year it's looking for adjusted earnings to climb 25% to 35%, with up to 48 new stores joining the system.  But it also has sizable direct competition in the sandwich realm -- Subway, the biggest chain by number of units, and also Jimmy John's, Firehouse Subs, Jersey Mike's and Panera (PNRA), to name only a few.

The shorts, however, have certainly liked what they've seen. Since the first short interest report became available, totaling 350,034 shares in mid-October, the overall position has jumped nearly 12-fold as of the end of February, to almost 4.5 million shares. That translates to a full 28.4% of the float, Yahoo Finance data show. It's also around four times the level of the recent group average.

At this point, the most intriguing question is whether short covering might be what keeps the stock from dropping all the way to, or even below, its IPO price of $14. It's already slid 46% from its all-time high at $33.90. Another 23% move down sounds like a lot, and it is, but the way things have gone for this new entrant to the market, it also doesn't seem entirely out of reach.