Dear Momentum Options Subscriber,

I’d like to expand on a stock I brought your attention to last week, provide more information about its history and talk about the rebound off of its recent lows. Options are unavailable on RAVE at this time, which is why we haven’t been trading the name.

Rave Restaurant Group (RAVE, $13.42, flat) took a tumble in May after announcing its quarterly earnings results. Shares were pushing $15 ahead of the news, but they tumbled to a low of $10.72 earlier this month.

The company reported a loss of $0.05 a share on revenue of $11.91 million. In the prior quarter, RAVE posted a quarterly loss of $0.04 a share on revenue of $11.1 million.

The quarterly losses could likely continue throughout 2015 and into 2016 before the company starts to see the fruits of its labor. However, revenues will explode once Rave’s “Pie Five” stores, which are currently being developed, start to mature. Therefore, I’m not too worried about the recent quarterly loss.

The company has more than $2 million in cash (and equivalents) and nearly $3 million in accounts receivable. This means that it won’t have to borrow money to build its company-owned stores.

Rave is on track to open 500 Pie Five restaurants over the next five years, and the company recently opened its 51st location. It will receive royalties from its strong partnerships and franchise agreements, which is what I want to expand on now.

The company’s CEO, Randy Gier, has a proven track record and has had successful stints at Frito Lay, KFC and Pizza Hut. He also has a talented team working with him, with Chris Smith, VP of operations, who helped Chipotle Mexican Grill (CMG) grow. Additionally, the company’s CFO, Tim Mullany, is a well-thought-of executive who worked in the same role for Smashburger.

Together, these three and the rest of the management team plan to dominate the fast-causal pizza industry. Pie Five cooks one of its pizzas in less than two minutes, and they taste really good. I know from experience, as I have tried a couple of different pizzas at its various locations.

While Pie Five will be its biggest bread winner over the next decade, Rave also has nearly 300 “Pizza Inn” locations. These types of restaurants are pizza buffets that are being rebranded and upgraded. It is still too early to say if this “turnaround” project will work, and this is one of the drags that has weighed on earnings.

At the height of its success, Pizza Inn had nearly 750 locations around the world. I mentioned earlier that this number has been halved, but this will be the first year that there are more openings than closings of Pizza Inn locations.

The Pizza Inn stores are usually single-franchisee units. The beauty of its Pie Five development is that the company is signing multiple-unit (usually 10-15 stores) agreements with established franchisees. Gier believes that the way to maximize the success of Rave is by partnering with seasoned restaurant owners who have proven track records themselves. In his words, “We don’t have time to train rookies or weed through amateurs.” Right on.

The beauty of Rave hidden behind the reason the company changed its name from Pizza Inn Holdings. The company wants consumers to “rave” about its brand and is not going to limit itself to just pizza. Down the road, I expect Rave to come up with another concept, but I can only speculate what it might be.

I mentioned coming into 2015 when shares were in the single-digits that once double-digits were cleared, shares might not look back. Following the journey to a 52-week high of $16.20, shares came close to testing single-digits, as they dropped to a recent low of $10.72.

The chart below shows the stock forming a floor of support at $11, with the 200-moving average and $10.50 as a sub-floor. Shares have recovered their 50- and 100-day moving averages, with further resistance at $14. A move above this level could lead to a return into blue-sky territory and another run past $16+.

RAVE

I have talked about the lack of Wall Street coverage on this small-cap gem, but some of the suit-and-ties have finally taken notice. Roth Capital initiated coverage of the stock in April with a “Buy” and matched my six- to 12-month target of $20 a share.

Last week, another brokerage firm issued a “Buy” rating with an $18 price target.

Shares look very attractive at current levels. If my price target of $20 is reached, it would represent a gain of roughly 50% from where the stock is currently sitting. However, I believe this stock should be a multi-year hold, with tremendous price appreciation if the company can execute its aggressive growth plans.

As far as the market goes today, the bears have been in control, but there are still several hours of trading to go.

The Dow is currently down 62 points to 18,081, while the S&P 500 is lower by 5 points to 2,119. The Nasdaq is off 8 points to 5,151, and the Russell 2000 is declining 5 points to 1,290.

I have updated our current trades below, so let’s go check the action.

Momentum Options Play List

Closed Momentum Options Trades for 2015: 65-20-1 (76%). All trades are dated and time stamped so new subscribers can look at the past history to see how the trades have played out.

Do not risk more than 5% of your trading account on any one trade but do try to take all of the trades. Please remember, all “Exit Targets” and “Stop Targets” are targets. You should not have any “Hard Stops” entered to close any trades or “Exit Orders” in your brokerage account unless I list one. I will send out a “Profit Alert” or “New Trade” if I want you to close a position or if a new trade comes out. Otherwise, follow instructions at all times in the 9 a.m. and 12 p.m. – 1 p.m. updates. Also, I will usually give you a heads-up if I think I’m going to send an email outside of these time frames.

All prices given in this update are current as of 11:30 a.m. EST.

I hereby disclose that I will be participating in the following trade(s). Every new Momentum Options recommendation is listed with the price at which I entered my own position. If the price is slightly different than my recommended entry or exit price when you receive the alert, don’t let that keep you from getting into or out of a trade. Occasionally, you might even get a better “fill” price than what is posted in the portfolio.

 

US Steel (X, $22.58, down $0.33)

X July 21 puts (X150717P00021000, $0.31, up $0.03)

Entry Price: $0.28 (6/23/2015)

Exit Target: $0.60

Return: 11%

Stop Target: None

Action: Short-term resistance is at $23.50. A move below $22.50-$22 could open the door for a test to $21-$20.

You can read my full report in this morning’s Pre-Market Update.

 

S&P 500 SPDR ETF (SPY, $211.59, down $0.45)

SPY July 200 weekly puts (SPY150710P00200000, $0.18, flat)

Entry Price: $0.45 (6/19/2015)

Exit Target: $0.90-$1.20 (Limit Order at $0.90 on first half)

Return: -60%

Stop Target: None

Action: Resistance is at $213. A close below $210 and the 50-day moving average would be bearish. Additional help is at $208 and the 100-day moving average.

You can read my full update on SPY and view the chart work in the June 22 Pre-Market Update.

 

Rambus (RMBS, $14.82, down $0.12)

RMBS August 16 calls (RMBS150821C00016000, $0.42, down $0.02)

Entry Price: $0.55 (6/19/2015)

Exit Target: $1.40

Return: -24%

Stop Target: None

Action: Support is at $14.50 and the 50-day moving average on a drop below $14.75. Resistance is at $15-$15.25.

You can read my full update on RMBS and view the chart work in the June 22 Pre-Market Update.

 

Microsoft (MSFT, $46.10, up $0.19)

MSFT July 47 calls (MSFT150717C00047000, $0.46, up $0.06)

Entry Price: $0.73 (6/18/2015)

Exit Target: $1.50

Return: -37%

Stop Target: None

Action: Resistance is at $47. Support is at $45.50-$45 and the 50-day moving average.

 

United Parcel Service (UPS, $99.86, down $0.89)

UPS July 105 calls (UPS150717C00105000, $0.15, down $0.08)

Entry Price: $0.53 (6/11/2015)

Exit Target: $1.05

Return: -72%

Stop Target: None

 

UPS October 110 calls (UPS151016C00110000, $0.41, down $0.05)

Entry Price: $0.70 (6/11/2015)

Exit Target: $1.40

Return: -41%

Stop Target: None

Action: Support is at $99 and the 100- and 50-day moving averages. Resistance is at $101.

You can read my extended write-up on UPS in the June 12 Pre-Market Update.

 

Wells Fargo (WFC, $57.78, down $0.11)

WFC July 60 calls (WFC150717C00060000, $0.18, flat)

Entry Price: $0.20 (6/5/2015)

Exit Target: $0.50

Return: -10%

Stop Target: None

Action: Resistance is at $58-$58.50. Support is at $57.

 

Trades on Hold — other 2015 Portfolio Open positions (2): These are trades that are still open in the portfolio but are down over 50%. They have longer expiration dates and are on “hold” but are not worth mentioning until they turn around. This means I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly when the trade closes or if the options expire. Click on the Open Trades and Closed Trades pages to see all open and closed positions.

Sony (SNE) July 33 calls (from 6/1/2015) — Continue to hold.

Rigel Pharmaceuticals (RIGL) September 5 calls (from 6/4/2015) — Continue to hold.

Trade on!

Rick Rouse
Editor and Chief Options Strategist
Momentum Options