Event: Casual restaurant Ruby Tuesday (RT) announced earnings after the market closed on Wednesday. The company reported that it made a profit of 4 cents per share in the quarter ending Sept. 4, 2012. Excluding items related to a search for a new CEO, the company would have earned 5 cents per share. Analyst estimates called for a profit of 5 cents per share. Revenues exceeded expectations coming in at $332.9 million versus an estimate of $330.5 million. Ruby Tuesday reaffirmed guidance for fiscal year 2013. Shares slumped more than 4% in premarket trading on Thursday. The stock is recovering slightly in regular hours trading, but is still down approximately 2% in the first hour of trading.
Analysis: The action in Ruby Tuesday is a good example of irrational trading. While the headline number suggested a poor result, the news for Ruby Tuesday was actually positive. It would appear that with the stock trading well off its 52-week high, short sellers seized the negative news and attacked. Weaker hands folded, creating an opportunity for new buyers with a long-term time horizon. The news could have been much worse for Ruby Tuesday. A turnaround looks to be in place and with profit guidance affirmed, the future looks bright for the company. Expected growth from the current fiscal year to the next is at a rate well above the current price-to-earnings ratio. This one is a buy on the unexpected weakness after earnings.
Action: Buy shares and hold for a three-month play in Ruby Tuesday’s recovery.
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