This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
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
EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stock Under $10 that he thinks could potentially double or triple in the next 6 to 12-months. See what he's trading today with a 14-day FREE pass.

Cramer: Not So Loco

Stocks in this article: LOCOGPROCMG

NEW YORK (Real Money) -- Maybe it's the name. Maybe it's the symbol. Whatever it is, when shares of El Pollo Loco (LOCO) -- 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.

Read More: Twitter Earnings Preview: What Wall Street's Saying

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.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

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
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, 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
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV

Markets

DOW 17,814.94 -2.96 -0.02%
S&P 500 2,067.03 -2.38 -0.12%
NASDAQ 4,758.2520 +3.36 0.07%

Our Tweets

Brokerage Partners

Top Rated Stocks Top Rated Funds Top Rated ETFs