Shares of trendy restaurant chain El Pollo Loco Holdings Inc (NASDAQ:LOCO) rallied meaningfully Thursday. As a result, LOCO stock has confirmed the recently constructive technical price action and how looks to have little resistance on the upside.
When El Pollo Loco reported its latest earnings on March 12, earnings came to 14 cents per share, beating analyst estimates by 2 cents. Revenues also came in better than expected, at $90 million versus estimates for $87.48 million.
Full-year 2015’s outlook roughly guided in line with analyst expectations, and that plus its earnings and revenue beats led to a good pop in the stock the following day.
The LOCO stock price has whipped around violently since its initial public offering last July, but after the big dropoff late in 2014, shares have built a better bottom from which they can work their way higher again. When new IPOs hit the market, most go through a challenging period as the initial excitement for the stock wears off and analysts have to come to grips with the company’s financials and growth potential.
Sometimes this leads to an initial rally in the stock followed by a selloff, other times it’s a selloff followed by a rally, and other times still a new IPO trades quietly for a few weeks/months before volatility hits. Almost all sought-after IPOs, however, have to go through a period of volatility in the first three to 12 months, which shakes out the weak hands in the stock before a truer move can unfold.
LOCO Stock Charts
In the case of LOCO stock, the rally came right out of the gate on the IPO date last summer; the stock then consolidated for three months and began to drop quickly. The late 2014 lows, however, formed above the IPO price (so, a higher low), and the stock has since traded in a much more calm and orderly manner to the upside.
In January, El Pollo Loco shares broke above their 50-day simple moving average (yellow line) and have more or less held above it/respected it ever since. Tactical investors in the stock should keep this level in mind to manage their risk for now.
Closer up on the daily chart of LOCO stock, we see that year-to-date, LOCO has formed two consolidation periods, both of which led to next up legs in the stock. On March 13 after the latest quarterly results, El Pollo Loco broke out of its multiweek consolidation phase, but then quickly began to consolidate again.
Thursday’s rally then broke the stock above its March highs, which barring any deep bearish reversal looks to have set the stock on a better upward trajectory.
Active investors could look to buy LOCO stock at $27.50 or higher for a move into the $30-$31 area.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.