Shares of El Pollo Loco Holdings, Inc. ($LOCO) sold off immediately after the company talked about upcoming quarterly guidance, which would likely be a bit softer with same store sales forecast at three to five percent for Q2 at 0.67 to 0.70 cents. Shares fell abruptly, trading lower by $4 from the Thursday close at $29 and settling in around $25 in last night's trading action. As a trader in this space, I think it tells you that investors expect growth in each quarter. Don't sandbag earnings in any way, or you will pay in share price.
The California-based operator came public in July 2014 at $15 and traded higher through year-end, reaching $40 before selling off. We published on the sector back in March, highlighting volatility in restaurant stocks and noted the blemishes for El Pollo Loco.
Today's action highlights how skittish investors are while trading around earnings. As top line numbers were solid for El Pollo, the company seems to be executing just fine. I think the drop is more a reflection of short term quarterly sharks who are in and out of the action for the day, who jumped on this stock as a short last night and are now trying to work their way out of positions before trading closes today. Most of these shorts are tied to the $25 level, and the last hour of trading today will tell you if they stay around and add to shorts next week. I expect they will not stay around and cover for the weekend.
Shares will need to trade back above $30 if the stock is to rid itself of the long term short sellers. The best way to do this is to lower expectations with lower guidance and then knock the ball out of the park next quarter. This is a common strategy for management when they know they have sales in the pipeline.
LOCO’s Short Sellers Beginning to Chicken Out
I am curious to see how long the sellers are willing to stay with the short position in LOCO. They had success in the final quarter of 2014, and any short seller would prefer to see a close below the $20 level.
The restaurant sector is always interesting to follow. It tests your patience as a trader, no matter if you are short or long. I think today's action is a bit overcooked, as $4 seems a bit too much for softer guidance. Today's close and the next week’s action will tell me a lot about how to trade shares for the summer. The company has 400 stores in five states, primarily in the western United States. They cater to the family demographic – a focus that seems to be hyper-sensitive for recent IPOs like LOCO.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer