This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Cramer: Not So Loco

NEW YORK (Real Money) -- Maybe it's the name. Maybe it's the symbol. Whatever it is, when shares of El Pollo Loco (LOCO - Get Report) -- the "crazy chicken" restaurant -- exploded higher on a second day after a robust opening, it once again inspired a whole new level of top-calling.

Is it justified? Does a stock that comes public at $16 that then goes to $19 on its first day and leaps to $34 on its second day make any sense at all? Can it signify something? Or is it a stock move filled with sound and fury, signifying nothing?

TheStreet's Jim Cramer shares his thoughts on where shares of El Pollo Loco will go next:

WATCH: More videos from Jim Cramer on TheStreet TV | More videos from Jim Cramer

First, we have to put this move in context, and the context that is GoPro (GPRO), which had a very similar move. The niche camera company, which is trying to grow into a full-blown ecosystem, came public at $24 -- the high end of the range. It jumped 32% on the first day to $31, then rallied to $35 the next day and then galloped to $40 before it peaked at $48. So El Pollo Loco might not be so loco. The GoPro move made sense in some ways because this is a popular company, particularly among teens, with a hot-selling product that conceivably has staying power. Plus, it's profitable.

El Pollo Loco, also a loved, fresh chicken product made the way that real Mexican roadside chicken is cooked, is also profitable: It earned 19 cents this past quarter. That's not to mention that it discovered Brad Pitt before anyone else did: When Pitt first moved to Los Angeles, one of his first jobs was standing in front of the Hollywood El Pollo Loco dressed as a chicken.

In any case, El Pollo Loco is what I call a sliver deal -- an offering of only 6 million shares out of a total of 35 million. GoPro, on the other hand, has almost 3x the shares outstanding. It is also a $5 billion company. El Pollo Loco is just north of $1.2 billion, so you don't want to ascribe too much too it.

Plus, El Pollo Loco looks like Chipotle (CMG). Of course, nothing is really like Chipotle, given that the company had 17% comparable-store-sales growth in its last quarter -- which is why it has a price-to-earnings ratio of 50.

But each El Pollo Loco store does make $1.8 million in average unit volume, which is $300,000 more than Chipotle's average stores first made. It has 400 restaurants currently, and believes there is room for 2,300 as it expands from regional -- California, Texas, Nevada and Utah -- to the rest of the country. This is a reasonable trajectory if the company executes correctly. Its comparable-store sales have been running in the high single digits, including one 12% comp number in the third quarter of 2012. Again, this is much better than the average chain, and the company's numbers have even been comparable to or better than Chipotle for many of those quarters.

Given the Mexican authenticity of the chicken, the company claims a special niche, the Hispanic population of the country, currently at 16% of the total. That said, I can tell you that this kind of chicken does have broader appeal. The company means it when it says in the prospectus that "this bird is en fuego." Plus, money from the offering will bring down high-cost debt, making it so that the profit picture could grow brighter as that debt gets paid down.

No one denies that the stock is speculative, but the simple fact is that this company is unique and it does have the characteristics of a company that could be the next Chipotle. So let's dream that its 19 cent-EPS quarter blossoms into a buck a share. Let's put the same multiple on it that Chipotle has, even though it has a bigger runway because it is smaller. You could see how someone could easily pay $50 a share for the stock.

Read More: United Airlines' Results Impress Wall Street, but Pilots are Doubtful

So, in sum, you may think it is loco. I think it was simply underpriced badly, with too few shares coming public -- and that this, in turn, forced institutions that want so-called full positions to go into the open market and pay a ton extra for more.

In sum, yes, there are always plenty of signs of a top out there, and it's good to enjoy healthy skepticism. But, I am sorry, El Pollo Loco simply isn't one of them.

At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, had no positions in the securities mentioned.

This article was originally published on Real Money at 7:11 a.m. on July 29.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Our Tweets

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs