El Pollo Loco slumps on Wall Street's valuation doubts

Yahoo Finance

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Fast food chain El Pollo Loco (LOCO) was having one of the worst days in its newly public history Tuesday, dropping nearly 10% after it became clear Wall Street thinks the shares have gotten overvalued.

Among new ratings Tuesday, Stifel Nicolaus and Jefferies issued holds, while William Blair set a buy on the stock. In recent trading, it was down $3.28 to $29.91. At the moment, analysts have what amounts to a $31 consensus price on the stock, according to FactSet.

IPOs, of course, often surge to great heights in their early days (they also often retreat, sometimes fast). In the case of El Pollo Loco, it was buoyed in its initial sessions by hopes investors would be purchasing stock in a company that could follow Chipotle's (CMG) extremely successful store expansion and price gains in the market. Though multiple disappointments have been found along that path, buyers can't seem to pass up the chance for fear they'll miss a winner.

Costa Mesa, Calif.-based El Pollo Loco's IPO was priced at $15 in late July. Within days, it climbed as high as $41.40, more than doubling its opening trade of $19 -- the realistic starting price for individual investors who aren't likely to get the IPO shares.

While that doesn't mean these believers are necessarily wrong in the longer term, prices can get out of line when it's hype that's primarily influencing the trading and few want to consider risk. El Pollo Loco, with around 400 Mexican-influenced stores specializing in grilled chicken, certainly has fans of its food, although more goes into a stock than whether the flavors are right. With these particular shares, financial analysts now commenting appear to generally believe not the company itself is toxic, rather that the stock gained too much, too quickly.

Recent restaurant initial public offerings have typically been met with a rush of buyers, even as the multiyear rally in the group has stalled in 2014. As can happen, those stock frenzies have a way of fading. Zoe's Kitchen (ZOES) has stayed above its first trades, but Potbelly (PBPB) and Noodles & Co. (NDLS), for example, have been disappointments.

The next restaurant that might have an IPO is burger seller Shake Shack, and with its New York base, it's a guarantee there will be substantial interest, especially with the "better burger" segment, one of the buzziest areas of the industry.

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