What a brutal six months it’s been for Portillo's. The stock has dropped 41.2% and now trades at $6.01, rattling many shareholders. This may have investors wondering how to approach the situation.

Is there a buying opportunity in Portillo's, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think Portillo's Will Underperform?

Even with the cheaper entry price, we're cautious about Portillo's. Here are three reasons you should be careful with PTLO and a stock we'd rather own.

1. Flat Same-Store Sales Indicate Weak Demand

Same-store sales is a key performance indicator used to measure organic growth at restaurants open for at least a year.

Portillo’s demand within its existing dining locations has barely increased over the last two years as its same-store sales were flat.

2. Breakeven Free Cash Flow Limits Reinvestment Potential

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Portillo's broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Portillo's burned through $14.95 million of cash over the last year, and its $655.3 million of debt exceeds the $17.23 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Portillo’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Portillo's until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

Portillo's falls short of our quality standards. After the recent drawdown, the stock trades at 31.3× forward P/E (or $6.01 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. Let us point you toward our favorite semiconductor picks and shovels play.

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