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Bear of the Day: Chef's Warehouse (CHEF)

David Bartosiak

Shrinking is never a good thing, unless you’re Alice trying to chase the White Rabbit. Shrinking profits and earnings estimates are even worse. That’s the story for today’s Bear of the Day, The Chef’s Warehouse (CHEF). CHEF is a distributor of specialty food products in the US. The company focuses on the needs of chefs who own or operate restaurants and fine dining establishments.

The stock is part of the FOOD-MISC/DIVERSIFIED industry that ranks in the bottom 30% of our Zacks Industry Rank. The Chef’s Warehouse’s Zacks Rank #5 (Strong Sell) rating comes mostly from the fact that three analysts have revised current year earnings estimates to the downside in the last 30 days, helping lower consensus from 95 cents down to 76 cents per share. This news comes on the heels of two analysts lowering next year’s estimates to 92 cents from $1.11 per share.

Part of the downward revisions is accounting for acquisitions CHEF made over the course of the last year or so. Revenue last quarter was in line with CHEF’s guidance, falling between $840 million and $810 million at $820.4 million. Analysts still remain concerned with earnings growth prospects in the near future. One bright spot is CHEF surprised to the upside by 10% last quarter. The surprise was not big enough to budge CHEF off our Zacks Rank #5 (Strong Sell).

The technical picture is text book for a momentum stock that went bust. You have a very strong uptrend in the stock, as well as earnings, which took it from trading down in the $12s to $30 in a 15 month period. Investors piled on and poured money into the stock as it maintained strong momentum and earnings growth. Note how the 25 day moving average shifted to the right by 5 days provides support throughout the rally from the teens. Given the volatile nature of this growth stocks, there were periods of time along the uptrend where the stock traced below support and still continued higher. That is the formula for a very strong momentum stock.

Recently is has been the exact opposite story. Funny how the technical picture changed as earnings estimates began to come down for CHEF. Since the New Year, there has been nothing but technical and earnings weakness coming out of CHEF. Here we now trade firmly below the 25x5 SMA, indicating the moving average will likely be resistance for any move to the upside. The recent gap below support at the 50% Fibonacci retracement from the low in the teens and high in the $30s suggests that traders have yet to find a fair value for where CHEF should be trading.

Investors looking to profit from other stocks in the industry should consider looking at Diamond Foods  (DMND). This Zacks Rank #2 (Buy) stock isn’t suffering from the same kind of negative news associated with earnings estimate declines. 

CHEFS WAREHOUSE (CHEF): Free Stock Analysis Report
DIAMOND FOODS (DMND): Free Stock Analysis Report

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