Jack in the Box and the Case for a 30% Rally

Key Points

• Shares have been trading soft recently, even as its peers have hit fresh highs. 
• Jack in the Box has a history of lagging its peers, but its comparative valuation has become quite attractive. 
• An entry opportunity has been developing, and some analysts are targeting a 30% upside.

While they managed to catch the initial wave of market optimism that swept across equities in November and December, shares of Jack in the Box Inc. NASDAQ: JACK have been on the back foot since January. They're currently down more than 10% from the peak of that rally as the stock's multi-year downtrend tries again to assert itself. 

It will disappoint investors who have watched McDonald's Corporation NYSE: MCD and Chipotle Mexican Grill Inc. NYSE: CMG soar to fresh all-time highs in recent weeks. For context, Jack in the Box shares are currently back trading at the same level they were in 2014. 

Recent Headwinds

Much of the negative pressure on shares comes from the weaker-than-expected growth signs, as shared in the company's earnings report last month. 

It missed analyst expectations on its earnings print, while revenue contracted more than 7% year-on-year. When so many equities are out there experiencing the opposite right now, it's understandable that many investors would want to throw in the towel. 

But according to one analyst team, now's not the time to walk away from Jack in the Box; if anything, it's time to start getting excited. Such was the sentiment from the Wedbush team, who only yesterday upgraded its rating on Jack in the Box shares from "neutral" to "outperform," while boosting its price target up to $88. 

The team there feels the market is taking an overly pessimistic view of the company's growth prospects, and the recent divergence in share performance from the rest of the market has opened up a solid entry opportunity. Their increased price target, with its suggested 20% upside, is a testament to this alone. They're also bullish on the company's valuation relative to its peers through a “45% discount to franchised quick service restaurant peers," which also materializes in the company's price-to-earnings (PE) ratio. At just 13, it compares very favorably to McDonald's 24 and Chipotle's 62. 

Considering a Position

It was an interesting stance, but they're not the first to come out with the bullish stance since the company's most recent results. 

Following last month's release, the Oppenheimer team reiterated its "outperform" rating on Jack in the Box stock and its $98 price target. With shares having slid considerably in the weeks since, with its current projected upside of some 30%, that target has only become more attractive. 

Jack in the Box has an unfortunate history of underperforming its peers. The fact that its shares are trading at the same prices they were a decade ago isn't exactly inspiring, nor is the fact the company wasn't able even to meet analyst expectations in its most recent earnings report. 

Weighing up an Entry

But if yesterday's Wedbush report is to be believed, the recent bout of soft trading has become overdone, and Jack in the Box shares are due a bounce. Investors should look for shares to continue consolidating in the low $70s as they look to form a near-term uptrend from last month's low of around $67. 

Technically, the fact they've managed to tread water above $72 for the past fortnight is bullish, as it's been forming a solid line of support from which to form a move north. Holding this will be crucial to have any hope of staging a comeback in the coming weeks and getting towards Wedbush's target of $88 or even Oppenheimer's at $98.