El Pollo Loco Earnings Preview: Expect a Big Move From LOCO Stock

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Translated from Spanish, “loco” means crazy, or mad, and it also happens to be the ticker symbol for El Pollo Loco Holdings (LOCO). The company announces earnings after Thursday’s close and, on a technical level, one would have to be crazy to buy the stock.

All of the major moving averages are trending lower, and a mini “death-cross” formed in early June, with the 50-day moving average falling below the 100-day moving average.

El Pollo Loco Earnings Preview: Skepticism for LOCO Stock

The company previously lowered its 2015 outlook following weaker-than-expected comparable quarterly sales that showed slowing growth. These were the culprits that dropped the stock from $29 to below $25 in mid-May, despite the company posting an earnings beat.

Since then, shares have continued to languish, so this will be an important quarter for the company. The suits-and-ties are looking for LOCO to earn 18 cents a share on revenue of just under $93 million.

Obviously, the company will need a blowout quarter and a change of heart on its previous full-year guidance before a rebound can occur. LOCO has exceeded estimates in the past two quarters by 1 cent and 2 cents and, in the two previous quarters, it matched expectations. Moreover, revenues have come in higher in the past four quarters ever since shares went public.

This is a slightly bullish setup that could send shares pushing $20 on top- and bottom-line beats. However, an earnings or revenue miss could send shares falling to the low-teens.

There are several ways to trade LOCO, as there are weekly and regular monthly options that can be traded on the stock. At current levels, I’m banking on a move greater than $2, up or down, but I’m on the fence as far as possibly taking an earnings trade.

The Aug $19 calls will easily double from current levels if shares clear $20 following earnings, as they would be $1 “in the money.”

The Aug $17 puts look tempting as well, as they would double if shares push $16 following the announcement.

Given the company’s solid track record, it would be hard to bet against LOCO, but its lowered outlook for 2015 has also created a little mistrust.

Together, the aforementioned call and put options would create a strangle option trade. The premium for both options would be around $1. The breakeven levels for this trade would be $20 and $16. However, a 100% return could be achieved if shares are pushing $21 or $15 after earnings or by next Friday.

This would require roughly a 20% move in the stock, which is possible given the current market volatility and the importance of the quarter. For now, however, I am not recommending any positions in LOCO.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/el-pollo-loco-earnings-preview-loco-stock-is-ready-for-a-move/.

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