Why Bojangles Fans Should Be Wary of Chasing Its Shares

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All 6 Fast Casual Chains to IPO in 2013-2014 Rose on Day 1

Bojangles’ Inc.’s stock sure looks good today, but it may end up giving you indigestion in the long run.

Bojangles, known for its fried chicken and ham biscuits, opened higher in its debut, climbing as much as 47 percent Friday after the company raised $147 million in its initial public offering.

With that jump, it followed in the footsteps of the six fast-casual restaurants, from Potbelly Corp. to El Pollo Loco Holdings Inc., that debuted in the past two years -- which soared an average of 98 percent on their first day of trading.

That’s not the end of the story, though. Following the first-day gains, five of the six have since lost more than half their value. Only Shake Shack Inc., the Manhattan-based burger chain, is now trading above its first-day closing price.

Who is left holding the bag when the shares fall? Often it’s individual investors -- who want to own the stock because they identify with a brand but can’t buy in at the IPO price because those shares are spoken for by large funds. Underwriters involved with these deals say that the demand pushing up prices on day one is often from retail channels.

Consider Jeremy Ashton, a 36-year old North Carolina native who said ahead of the debut that he wants to invest in Bojangles because of his affinity for the company’s ham biscuits and seasoned French fries.

Ashton, who works for the South Florida Water Management District in West Palm Beach, is hoping the IPO helps Bojangles expand. As of now, the restaurant is in the Orlando area, about 2.5 hours away from his home by car.

‘Might Be Fun’

“It might be fun just to say I own a piece of Bojangles,” he said. “I was excited to hear they might be using the IPO to fuel some expansion.”

Ashton said he wasn’t going to buy shares Friday, preferring instead to wait to see how the price shakes out.

Bojangles Chief Executive Officer Clifton Rutledge said he would continue to focus on the chain’s food and long-term growth strategy, rather than the company’s share price.

“I’m not going to worry about the stock and where it goes,” he said. “We’re going to continue with our strategy. It’s all about the food, and that’s what we’ll focus on.”

It’s not just the Jeremy Ashtons of the world who drive gains. Hedge funds anticipating the surge to come are also piling in, at least early on, underwriters say. Demand for Bojangles shares was strong enough that it raised the offering range by $2, priced at the high end of the new range.

With many restaurant IPOs, it doesn’t take much push the shares higher. The companies tend to have a modest amount of shares available for trading.

Double-Edged Sword

That same factor works against the shares when investors panic after a bad bit of news. That happened to Potbelly when it missed earnings estimates and the stock sank 25 percent in one day last July. Habit Restaurants Inc. was hammered after a few unenthusiastic analyst ratings, while Zoe’s Kitchen Inc. fell after a follow-on equity offering.

Even Shake Shack hasn’t been immune to volatility: It has lost almost 20 percent of its value over the past three trading days.

“There’s a double-edged sword to listing a thin percentage of the company,” said Michael Scanlon, a managing director at John Hancock Asset Management, overseeing $3 billion in assets. “You get the supply-demand mismatch and the stock gets bid up in excess of where it should be. That works on the downside as well if you have a negative news event.”

Bojangles may not be the last to repeat this pattern. On May 6, Wingstop Inc., which sells chicken wings in a variety of flavors, filed to go public. Fogo De Chao Inc., an all-you-can-eat Brazilian steakhouse, is also on tap.

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