When a momentum stock shows weakness, it gets crushed. This is the lesson investors of El Pollo LoCo Holdings Inc (NASDAQ:LOCO) are learning Friday after the Mexican restaurant chain delivered a weak outlook, sending LOCO stock plummeting more than 14%.
Is now the time to pounce on LOCO stock? Don’t even think about it — not until the dusts settle.
Investors didn’t care that the Costa Mesa, California-based company beat on both revenue and profits. The more important question is always, “What’s next?”
LOCO management didn’t provide the right answer.
The Quarter That Was
For the full-year, ending in December, El Pollo Loco stuck by its prior-stated guidance range of 67 cents and 71 cents in earnings per share. LOCO didn’t guide upward, even though El Pollo Loco posted same-store sales for the latest quarter that climbed 5.1%, surpassing Wall Street estimates.
All told, LOCO has now grown revenue (at established restaurants) for 15 consecutive quarters.
Still, El Pollo Loco failed to deliver the sort of confidence momentum plays need to suggest LOCO stock deserves a higher multiple. Sure, there’s still more growth ahead for LOCO stock. After all, it’s only one quarter.
Yet, for now, the smart play is to stay away from LOCO stock and assume the easy money on has already been made. Execution is how LOCO stock will be judged from this point forward.
For the quarter that ended March, El Pollo Loco earned $6.8 million, or 17 cents per share. On an adjusted basis, when excluding one-time gains and costs, earnings per share came to 18 cents, topping analysts’ estimates by a penny.
First-quarter revenue of $90.43 million, up 11% year over year, topped estimates by some $2 million. Restaurant traffic was up modestly at 0.1%, while LOCO grew average receipts by 3.4%. These are the metrics you’d want to see, especially from a young company like El Pollo Loco.
And beating estimates is nothing new for El Pollo Loco, and for this reason, LOCO stock had been on a tear — surging almost 50% — since El Pollo Loco went public in the summer of last year. LOCO stock moved quickly ahead of its initial public offering price of $15 per share, gaining almost 180%, reaching its 52-week high of $41.70.
But now, it’s time to pause and make sense of all of the excitement. Sure, there’s also the chance that management is just being conservative with its guidance, not wanting to set expectations too high. But given the run LOCO stock has enjoyed in such a short period of time, expectations were already high.
In fairness, that’s not El Pollo Loco’s problem. Management’s job is to run business, not become the PR for LOCO stock. El Pollo Loco maintained its outlook, it didn’t lower it. So, expectations were correctly set. Investors disappointed themselves.
Bottom Line For LOCO Stock
From my vantage point, this 14% selloff is overdone. I don’t have the confidence in the market to think that the inverse momentum will end quickly. In other words, just as fast as LOCO stock climbed, it can also fall at the same pace.
The next good idea is what momentum traders crave. And Friday, LOCO stock has fallen off the list. And investors looking for entry points should wait to confirm that LOCO stock can stay above $25.
If El Pollo Loco falls below $25, wait until LOCO stock reaches $20 or 8%-10% above above its 52-week low before buying. Any buys before that level, you might get hurt.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
