Down 18% since listing, should you buy Guzman Y Gomez shares now?

Guzman Y Gomez shares have come back to earth following the blockbuster IPO. Time to buy?

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Guzman Y Gomez (ASX: GYG) shares are taking a tumble today.

Shares in the Mexican fast-food restaurant chain closed up 2.7% at $25.50 yesterday. In late morning trade on Wednesday, shares have given back those gains and more, currently changing hands for $24.70, down 3.1%.

For some context, the All Ordinaries Index (ASX: XAO) is up 0.3% at this same time.

As you can see on that chart above, Guzman Y Gomez shares have had a tough time of it since their debut on the ASX on 20 June.

Investors who were able to take part in the initial public offering (IPO) could have gotten in for $22.00 a share. For the rest of us, the fast-food stock opened on 20 June, trading at $30.00 per share. Shares hit an intraday high of $30.99 before ending the day back at $30.00.

That handed IPO investors a tidy 36% one-day gain.

Not bad.

Now, IPO investors are still in the green.

But with today's losses factored in, the Guzman Y Gomez share price is down 17.7% from the opening price on its first day of trading on the ASX when most retail investors would have gotten a foot in.

Following that sizeable retrace, should you buy the Mexican fast-food stock now?

Are Guzman Y Gomez shares a buy?

The biggest concern you're likely to hear about Guzman Y Gomez shares is their sky-high valuation.

Especially when compared to fast food rivals Collins Foods Ltd (ASX: CKF) and Domino's Pizza Enterprises Ltd (ASX: DMP).

The key to the company's success at current valuations is to deliver on its ambitious growth plans.

And it's with this growth potential in mind that Morgans has placed an add rating on the stock with a $30.80 price target. That's almost 25% above current levels.

According to Morgans' analyst Billy Boulton (quoted by The Australian Financial Review), "To justify the current share price of GYG (or, indeed, to see upside to it), you have to believe that the long-term growth story is not just possible, but likely."

Boulton added:

We believe investors buying into GYG at current prices will be well rewarded over time as the business realises its very significant long-term growth potential and its earnings benefit from strong operating leverage.

Guzman Y Gomez shares currently encompass 210 stores, with 185 in Australia. Morgans believes the company can eventually grow its Aussie footprint to 1,000 stores. If the broker has that right, early investors could indeed be amply rewarded.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Domino's Pizza Enterprises. The Motley Fool Australia has recommended Collins Foods and Domino's Pizza Enterprises. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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