It’s been a rough ride for El Pollo Loco Holdings Inc. (NASDAQ:LOCO) investors since the company’s initial public offering in July. After rocketing to $41.70 in short order, the stock faltered and has since fallen nearly 40% to trade in the $24-$25 region.
But El Pollo Loco has a chance to change that path after the close this Thursday, when the company will release its fourth-quarter earnings report.
For the record, El Pollo Loco is expected to post a profit of 12 cents per share, with revenue seen arriving at $87.5 million. The company has experienced some serious growth concerns during the past year, with expansion into eastern states proving problematic. In fact, El Pollo Loco currently only has plans to open five stores in the next year.
If the company is to silence the growing chorus of naysayers, it will have to offer stronger guidance and wealth of new store openings.
On the sentiment front, the brokerage community has all but ignored LOCO stock. According to Thomson/First Call, only five analysts have deigned to offer up ratings on the shares, doling out three “buys” and two “holds.” The 12-month consensus price-target currently rests at $27, a premium of only about 12.5% to LOCO’s current perch at $24.
Short sellers have been the most aggressively bearish on LOCO stock. As of the most recent reporting period, some 4.4 million shares of LOCO stock were sold short, representing a hefty 33.5% of the stock’s total float, or shares available for public trading.
This wealth of short interest could provide ample fuel for a short-squeeze situation, if only the company can provide enough reason for El Pollo Loco stock to rally post-earnings.
If short sellers are worried, they aren’t showing it by purchasing calls as position hedges. Currently, LOCO’s March/April put call open interest ratio comes in at 1.05, indicating parity between calls and puts among near-term options. This ratio even rises slightly to 1.15 in the weekly Mar 13 series of options.
Click to Enlarge Overall, weekly Mar 13 series implieds are pricing in a potential post-earnings move of about 8.3% for LOCO stock. This places the upper bound at $25.99, while the lower bound lies at $22.01. A jump in either direction would be significant for LOCO stock, as the shares have been range-bound near $25 for about the past two months.
The shares are currently pinned between their 10-day ($24.31) and 20-day ($26.49) moving averages.
2 Trades for El Pollo Loco Stock
Call Spread: Given the low expectations for LOCO stock — especially the high level of short interest — a contrarian play ahead of earnings has quite a bit of potential. Traders looking to take a chance on a bullish LOCO stock trade might want to consider the Mar $24/$26 bull call spread.
At last check, this spread was offered at 73 cents, or $73 per pair of contracts. Breakeven lies at $24.73, while a maximum profit of $1.27, or $127 per pair of contracts, is possible if LOCO closes at or above $26 when March options expire.
Put Spread: For those traders looking to jump on the bearish bandwagon, a Mar $23/$24 bear put spread also has plenty of potential. At last check, this spread was offered at 45 cents, or $45 per pair of contracts. Breakeven lies at $23.55, while a maximum profit of 55 cents, or $55 per pair of contracts, is possible if El Pollo Loco stock closes at or below $23 when March options expire.
Finally, this trade could realize a double at $23.10, so be sure to set a limit order ahead of time to lock in profits.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
