2 Restaurant Stocks that Could Burn Short Sellers

Restaurant stocks haven't been the best investment choice over the past year. According to Schaeffer's Senior Quantitative Analyst Rocky White, only 50% of the names in our Restaurant sector are trading above their 80-day moving average, and the group had an average year-over-year gain of just 0.5% at Tuesday's close, vastly underperforming the broader market. However, Buffalo Wild Wings (BWLD) just yesterday soared after earnings, and now traders will digest results from Papa John's International, Inc. (NASDAQ:PZZA) and Texas Roadhouse Inc (NASDAQ:TXRH), with both companies set to report earnings on Monday.

Papa John's Stock Hopes for Another Earnings Boost

PZZA stock is heading into the quarterly event in a long-term downtrend, with the shares essentially drifting lower throughout 2017. The security hit an annual low of $65.95 two days ago, and at $68.37, it's down 20% year-to-date.

Looking back, though, Papa John's has a fairly good post-earnings history. Over the past eight quarters, the equity has moved higher in the session after the company reports six times, including a 9.6% jump last quarter. In the equivalent quarter last year, PZZA shares rose 5% after earnings. On average, the shares have moved 7.2% the day after earnings, and this time around the options market is pricing in a one-day move of 8.2%, per at-the-money implied volatility data.

A number of short sellers are expecting more downside for the stock, though. For the most part, short interest has been on the rise for the past three years, including a 9.1% increase in the last two reporting periods. The 5 million PZZA shares sold short are the most since 2008, and equal more than eight times the stock's average daily trading volume.

Texas Roadhouse Ready for Another Earnings Breakout

Meanwhile, TXRH shares come into earnings season riding a long-term channel of higher highs and lows. Just last week the security touched a record high of $52.02, and it's currently sitting just below this level at $51.74. Overall, Texas Roadhouse is up almost 32% over the past 12 months.

Investors should be encouraged by the equity's recent earnings reactions, too. Specifically, the shares have gained in the session after earnings in the last two quarters, including an 11.6% surge in May. Going back eight quarters, TXRH has averaged a one-day move of 7.8% after earnings, regardless of direction, and this time around options traders are expecting a swing of 9.2%.

Despite all this, Texas Roadhouse remains surrounded by short sellers. More than 6% of the equity's float is controlled by these bears, which would take nine days to cover, going by the average pace of trading. As such, another earnings beat could result in a short-squeeze situation for TXRH.