El Pollo Loco Huge Discount Secondary Creates Ugly Technical Event

In some ways, this discounting is similar to the fresh GoPro secondary that also priced for Thursday. The key difference is that the secondary offering from El Pollo Loco is far worse. For editorial cleanliness, we avoided naming this story “Secondary Offering Analysis: How the Crazy Chicken Choked Its Stockholders.”

All the shares being sold were from insiders, so no benefit is going to the company itself. The Crazy Chicken announced its pricing Thursday morning at $27 per share on 6 million shares, with an option for underwriters to purchase up to 900,000 additional shares. The total value of the filing is $186.3 million, including the overallotment option.

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At this pricing for the offering, the company is effectively forcing almost all of its post-IPO investors into a stock loss on paper. Whether they hold or give up is something that won’t be known for some time. This is very unfortunate considering the company has been red-hot since its IPO, when everyone wanted a piece of the action. Also, the market has been strong.

As far as how this secondary offering compares to the IPO, El Pollo Loco sold 7.1 million shares originally priced at $15 per share. The stock came public in late July, when it entered the market at $18.48 and went above $24 in the first day. The second day trading opened at $26.88, rising to $34.48 — and this stock hit $41 on both August 1 and August 4.

The long and short of the matter is that the initial pricing of $15 going to more than $40 is nothing short of a hot IPO. This secondary is ice cold.

There may be some hope that is not represented in the stock chart below. The hope would be that this secondary was telegraphed too far ahead and it allowed short sellers and those wanting out to lock in their prices higher. After all, it was a $35 stock just five trading sessions ago.

Some investors may jump in thinking that this secondary’s drop and discount was too large. And some investors who feel they missed the Crazy Chicken gravy train may feel that this low price entrance gives them an opportunity to buy on a serious pullback. The flip side is that this pricing could have triggered a lot of bad blood. The company gets nothing and insiders get to cash out at a price that is 80% higher than the IPO price — so why should management care if the new shareholders have to stomach paper losses.

Hopefully you get the idea here. Sadly, these insiders may have many more stock sales down the road as well.

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The “use of proceeds” should only highlight how this secondary is just that much more for the benefit of insiders and backers of the company only, rather than the shareholders:

The selling stockholders named in this prospectus are offering 6,000,000 shares of common stock. … Accordingly, we will not receive any proceeds from the sale of shares of our common stock by the selling stockholders, including the sale of any shares by the selling stockholders if the underwriters exercise their option to purchase additional shares of common stock.

The StockCharts.com chart below should signal just how bad of a technical event has been created here. Holders who got in after the first or second day of trading after the IPO are probably feeling a little ripped off. Welcome to the stock market.

Shares of El Pollo Loco closed down nearly 8% Wednesday, and the early trading on Thursday had shares barely above $28.00. The stock has a consensus analyst price target of $29.00 and a post-IPO trading range of $18.48 to $41.70. The market cap is just over $1 billion.

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