Should Dave and Busters (NASDAQ: PLAY) Investors Sell (Before) the News?

Restaurant gaming operator Dave and Busters (NASDAQ: PLAY) shares have quadrupled since its pandemic lows of $4.61 in March 2020. With all 137 locations shut down from the stay-in-shelter mandates since Mar. 20th, revenues have been frozen heading into the Q1 2020 earnings release. Due out Jun. 11, 2020 after the close. While shares have rallied with the S&P 500 index (NYSEARCA: SPY) , shares may have gotten ahead of themselves. The recent trend of sell-the-news reaction to earnings beats should be considered as a very viable outcome. Investors may consider winding down positions to get ahead of the curve to protect or salvage gains ahead of the earnings reaction. Fortunately, the weekly bullish seed wave provides some cover with three upside price reversal zone (PRZ) targets to serve as a price trajectory guide.

Sell the News Reactions Template

The latest trend with earnings has been the sell-the-news reaction despite beating consensus analyst estimates. This template has been consistent in recent weeks during the pandemic regardless of sector or industry. Recent examples of sell-the-new earnings reactions can be found in shares of Take-Two Interactive (NASDAQ: TTWO) , Zoom Video Communications (NASDAQ: ZM) , Cloudera (NASDAQ: CLDR) , and Slack Technologies (NASDAQ: WORK). All Companies’ earnings exceed consensus analyst estimates but shares collapsed in reaction to them afterward.  

COVID-19 Effects

Business was already on a downward trajectory ahead of the coronavirus pandemic as indicated by the comparable store sales drop of (-4.7%) year-over-year in Q4 2019 despite the 4.6% YoY revenue growth. Dave and Busters put 90% of its staff on furlough and halted all new store construction and upgrades to conserve the cash bleed. The Company also suspended dividends and share repurchase programs. No word on whether rent payments were halted as well as their massive locations are usually found in shopping malls through the U.S., Canada, and Puerto Rico. As regions lift isolation mandates, the restart narrative kicks in as malls re-open. The question is how new safety measures will to maintain social distancing affect expenses and top line revenues. There is “pent-up” demand from consumers with cabin fever looking to leave the house, however, what kinds of liabilities will also come with having indoor crowds inside the locations.

Secondary Offering

As announced on April 14, 2020, Dave and Busters entered into an agreement for a secondary offering with underwriter Jeffries. The Company priced its secondary offering by selling 9.578 million shares at $10.44-per share on May 6, 2020 for approximately $100 million before expenses in proceeds. The Company also added managing director at private equity firm KKR & Co. (NYSE: KKR) John Hockin to its board of directors. KKR owns an 8% stake in the Company. Before speculation arises for a Dave and Buster’s takeover or private equity LBO speculation, it has to be noted that KKR had already taken the formerly public company private and re-spun it out in an IPO in 2014. It’s highly doubtful there is any LBO interest in this one again. With earnings release due out post-market on June 11, 2020, investors may want to unwind some of their positions in the event of a sell-the-news reaction which has been the common template.

Price Trajectories

Using the rifle charts on a weekly and daily time frame provides a broader view of the landscape for PLAY stock. The weekly rifle chart triggered a market structure low (MSL) above a the $18.75 Fibonacci (fib) level. This combined with the daily stochastic mini pup has also triggered the weekly seed wave bullish price pattern which provides three distinct price targets and subsequent potential reversal zones (PRZ). Prices tend to form a reversion at each level with a final topping out if it reaches the PRZ3, which is the 1.618 fib extension. These PRZs are sufficient levels for longs to consider winding down shares to protect or salvage gains. The PRZ trajectory levels are at $22.58 (PRZ1: 1.27% fib extension), $24.69 (PRZ2: 1.414 fib) and $27.57 (PRZ3: 1.618 fib). Nimble traders may consider playing reversions off these levels. The nominal pullback to the 15-period MA sits near the $15.72 fib, which would be an opportunistic pullback level for longer-term risk-tolerant investors to consider buying back into.