This article originally appeared on RealMoney.com on Sept. 4, 2014 at 12:30 p.m. To read more content like this AND see inside Jim Cramer's multi-million dollar portfolio for FREE... Click Here NOW.
How do you play stocks that are crazily mispriced on fundamentals? Carefully.
Long-term cult stocks such as Amazon (AMZN) and Tesla Motors (TSLA) have burned short sellers who had been sure those shares would fall back to earth. Investors have given those companies a free pass on valuation and on any need to show earnings per share that justifies their lofty share prices.
More mundane companies are typically held to a higher standard, and that has proven especially true in the restaurant industry. Hot initial public offerings have often turned into cold gruel within months. Sandwich maker Potbelly (PBPB) , for instance, gapped up initially from its IPO price, but then traded down more than 63% from its recent high as of Wednesday's close.
STOCKS TO BUY: TheStreet Quant Ratings and Dave Peltier's Stocks Under $10 has identified a handful of stocks that can potentially TRIPLE in the next 12 months. See them FREE today... Click Here NOW.
Fellow restaurateur Noodles (NDLS) experienced a similar pattern. The post-IPO surge didn't last long. Noodles has already given up about 64% from its 2013 peak.
Enter El Pollo Loco (LOCO) , which is due to report earnings after the bell on Thursday. Management had been justifiably thrilled to get $15 per share as an IPO price, as the firm had been nearly bankrupt not too long before that point.