Generally, it’s not a good idea to move against the overwhelming consensus view of Wall Street analysts, which is what I’m doing with Chefs’ Warehouse (NASDAQ:CHEF). Offering premium ingredients for restaurants, CHEF stock’s bull case aligns with the broader retail revenge phenomenon (post-COVID shopping). Nevertheless, a few key trades in the options market suggest that more bearish trades may be coming. Therefore, I am bearish on CHEF stock.
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CHEF Stock Symbolizes a Conflicting Conundrum
Fundamentally, CHEF stock symbolizes a conflicting conundrum. On the one hand, the COVID-19 crisis offered the restaurant industry an unexpected catalyst. With people cooped up in their homes for extended periods, the subsequent revenge travel sentiment skyrocketed. People still overwhelmingly desire retail experiences that were denied them because of the pandemic for two years, which explains why analysts are so bullish on CHEF.
On the other hand, consumers likely cannot continue exercising their vengeance while blissfully ignoring their financial situations. Sure, the directive to make up for lost time apparently overtook most other considerations. However, with Americans’ credit card debt racking up to over $1 trillion – a dubious record – prudence will eventually take hold. When it does, CHEF stock could be in trouble.
Mainly, that’s because Chefs’ Warehouse provides premium ingredients for high-level restaurants. And even reasonably wealthy people might see less justification for increasingly costly entertainment. Of course, that’s a significant concern for restaurants that cater to middle-income patrons. It’s all too easy for consumers to trade down to cheaper alternatives.
Therefore, it’s not shocking to see that options traders – essentially the “smart money” – appear to have cast their doubts on CHEF stock. Looking at options flow data, which filters exclusively for big block trades likely made by institutions, the most recent major trade involved the acquisition of 1,013 contracts of the Dec 15 ’23 25.00 put on September 21, as shown below.
Notably, at the time of the transaction, the open interest for this derivative sat at 164 contracts. Following the September 21 trade, open interest shot up to 1,056 contracts. It remained that way until the end of September, indicating a still-open bearish position.
Watch Out for Possible Hedging Activities
One of the consequences of analysts’ bullish view on CHEF stock is that they may have influenced many options traders to take neutral to bullish transactions. However, because these transactions are now working against the option writers (writing refers to selling a contract without owning it), it’s not inconceivable to see hedging activities that could drive CHEF even lower.
For instance, back on January 13 of this year, a major trader (or multiple traders) wrote a combined 1,200 contracts of the Dec 15 ’23 35.00 put. At the time of the transaction, the open interest of this option sat at only two contracts. As of the most recent data, the open interest for this option landed at 380 contracts. So, the traders exited most of the exposure to this trade but not all of it.
In addition, on April 25, a trader wrote 500 contracts of the Oct 20 ’23 30.00 put. Back then, the open interest for this option was 152 contracts. As of this writing, the open interest stands at 1,010 contracts. Thus, exposure to this put contract has widened. That means the writer is obligated to buy back CHEF stock at $30 if the option holders exercise the contract.
Well, CHEF stock is near $21 right now. If it remains below the strike prices of the $30 and $35 puts, these option writers could be obligated to buy CHEF stock at those higher prices. To mitigate this risk, they might buy puts to offset their sold puts, which can put further downward pressure on the stock. And to be sure, that may have already happened. Nevertheless, the options chain is anonymous. Unless traders want to share, no one knows for sure who made what trade and for what reason.
Given this ambiguity, it’s not impossible to see more bought puts materialize. Therefore, investors need to be extremely cautious with CHEF stock.
Is CHEF Stock a Buy, According to Analysts?
Turning to Wall Street, CHEF stock has a Strong Buy consensus rating based on four Buys, zero Holds, and zero Sell ratings. The average CHEF stock price target is $45.00, implying 116.9% upside potential.
The Takeaway: CHEF Stock May be Too Hot for the Kitchen
While CHEF stock might seem as though it presents plenty of value because of its recent fall, contrarians must exercise ample caution. Yes, CHEF seems undervalued, and it’s also true that analysts love the underlying business. However, options traders took bullish bets on the enterprise earlier in the year. Those bets now may go awry, forcing hedging behaviors. Unfortunately, said behaviors may negatively impact the share price.
