When Will El Pollo Loco Stock Cool Off?

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Since its trading debut six trading days ago, El Pollo Loco Holdings Inc. (NASDAQ: LOCO) has seen its share price close post a new post-IPO high on five of those six days. Shares opened at $19 on the first day of trading and closed this past Friday at $41.20, up nearly 120%.

Like all things that can’t go on forever, El Pollo Loco’s rising share price will eventually slow and then stop. There’s little question that some of the share price rise is the result of (favorable) comparisons to the hottest restaurant stock of the past several years, Chipotle Mexican Grill Inc. (NYSE: CMG). Chipotle Mexican Grill’s stock has soared some 1,400% since coming public in 2006, revenue has risen by a factor of five, and the number of restaurants has tripled.

In Chipotle’s first six trading days, however, the share price slipped from an opening price of $45 a share to $44.75 after peaking at around $47.50. So there’s little question about which of the two stocks has performed better right out of the chute.

It almost seems that the comparison to Chipotle is based solely on the fact that both stores offer Mexican-influenced food. And it’s true that El Pollo Loco has learned some valuable lessons from Chipotle, like keeping things simple, fresh, and healthy. From now on, it’s a matter of execution.

Investors don’t want to miss out on a chance to get a piece of the hottest company of the past couple of weeks. It’s worth noting, however, that El Pollo Loco is using essentially all the proceeds (about $123 gross) from its IPO to pay down total debt of about $289 million.

In order to keep growing, El Pollo Loco may have to take on more debt or do a secondary offering sooner than many analysts and investors may expect. Nothing will kill a high-flying stock faster.

Shares of El Pollo Loco posted a new post-IPO high of $41.70 on Friday. The low is $18.48.

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