Bob Evans Farms, Inc. (BOBE) Could be a Tasty Stock Morsel

"Stocks Under Rocks" is designed to introduce you to some lightly-traded equities that may not attract much attention or press but that could be poised for gains in the short or intermediate term.

Just the Facts

Bob Evans. You’re probably aware of the red script font, the barn-like architecture and the menu bursting with comfort food (seriously, where else can you get a sausage, egg, and cheese biscuit COVERED in country gravy?). But have you ever considered putting Bob Evans the company in your portfolio?

Earlier this month, the Columbus, Ohio-based restaurant chain reported fourth-quarter net income of $21.1 million, or 69 cents per share, a 33% increase from the previous year’s results and a clear positive surprise over analysts’ per-share estimates of 39 cents. Net sales were marginally lower for the reporting period.

Stop the presses – what? A restaurant chain weathering the recession? Just because people are cutting back on discretionary spending doesn’t mean they’ve learned to cook (or learned to enjoy cooking), after all. And Bob Evans provides an affordable and convenient choice for families looking to escape from the kitchen.

Additionally, BOBE executives implemented some changes that helped reduce labor and food costs. And the company is holding back on expansion plans; next year, BOBE plans to open two "Mimi’s Café" locations and no Bob Evans restaurants. In fiscal 2009, 12 new Mimi’s Cafes switched on the lights, along with one new Bob Evans.

On Monday, KeyBanc analyst Brad Ludington boosted his rating on BOBE to "buy" from "hold," citing a downward-looking forecast for sow prices, menu improvements, and marketing efforts. There are currently five "hold" ratings on BOBE and two "buys," leaving room for more upgrades if the fundamental backdrop remains strong for the eatery.

Charting a Path

On the heels of its June 2 earnings surprise, BOBE mounted a two-day rally of more than 20%. What’s encouraging is that even while the market has been grinding lower in recent sessions, BOBE has retained much of these gains, holding above former short-term resistance near the 26 mark. The shares are also testing the support of their ascending 10-week moving average. One technical concern is that BOBE isn’t far from its 52-week high – about 17.5% shy – so it could hit some psychological resistance in this area.

Also of Note

Short sellers have shown a bit of interest in the stock, which currently boasts a short-interest ratio of 7.6. In other words, short interest is 7.6 times the equity’s average daily volume. But the number of shorted BOBE shares dropped to 2.0 million from 2.42 million during the last month, suggesting some of the short sellers may be heading for the hills amid the stock’s move higher.

BOBE is an optionable stock but is lightly traded, putting challenges on liquidity. Open interest is heaviest in longer-dated series; the September 30 call and put (possible a spread in play) have a few hundred open contracts, as does the out-of-the-money December 30 call.

So even if you’re a vegetarian or health nut, BOBE could give some life to your portfolio. If you don’t have a taste for this equity, check out past Stocks Under Rocks articles, Jud Pyle’s Volatility Overlays, or the Trading Ideas column.