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Long/short equity, contrarian, growth at reasonable price, hedge fund manager
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Summary

  • As I wrote before, I love Chipotle, but its high multiple and heavy coverage kept me from buying the stock for a long time.
  • After finally convincing myself to buy 5000 shares, I quickly unloaded half of them during a brief sell-off. With another monster earnings report out yesterday, I'm ruing that hasty decision.
  • Chipotle could very well be a once in a lifetime company (like Starbucks) that defies normal stock metrics and remakes its industry.

I got chewed up pretty good when Chipotle (NYSE:CMG) delivered a delicious earnings report after the closing bell yesterday and shot up over 12 percent.

Technically, I didn't lose money. I'm not short the company. As a rule, I don't short popular, fast growing companies with visionary executives. I actually own 2500 shares of CMG for my hedge fund, so I've made a good deal of profit from the rally. But I should have made a whole lot more--double to be exact--and sometimes that hurts just as bad, if not worse.

A few months ago I wrote an article for Seeking Alpha about my mental back-and-forth with Chipotle. I've always admired the fast casual company, and its management. And after meeting its head of investor relations at the company's Denver headquarters last summer, I was very tempted to buy its stock, which was selling for around $370 at the time, but the price-earnings multiple scared me away. As anyone who has paid the slightest attention to Chipotle would tell you, that was a very dumb choice.

Within a few months of my meeting at Chipotle's corporate offices, its stock was up over 100 points, making it my biggest miss of 2013. And it just kept rising. By the time I wrote my article in early February of 2014, it had gone past $500 and I started to experience an unpleasant deja vu. Chipotle was reminding me of the biggest miss of my career, Starbucks.*

Way back in the early 1990s, just months after its IPO, I visited with the CFO of Starbucks at its Seattle headquarters. Like Chipotle, I loved the company, its management, and its products. I still do. But like Chipotle, its PE multiple was quite large and scared me off. I figured I'd wait for the stock to dip and then I'd buy in. It never did. Since then, it's gone up 120 times.

Let me put that another way: I could have bought in early on a 120 bagger, but I whiffed on the chance.

Please pass the antacid.

Not wanting to make the same mistake again with Chipotle, I eventually did buy 5000 shares at $510. But I wasn't thrilled to be in the stock. You have to understand, this was not an easy purchase for me. I'm a GARP guy. I don't buy pure growth or momentum stocks that have already been bid up to high multiples. Starbucks had a multiple in the 30's in the early-90s. That was too big for me then, so Chipotle's 40+ multiple made me very, very queasy.

Also, I generally stay away from "famous" stocks, companies with analysts crawling all over them, inspecting every little nook and cranny. With all that scrutiny and market exposure, those kinds of stocks are almost always priced efficiently. I like smaller, less studied companies. That's where you're likely to find profitable inefficiencies between earnings projections and share prices. Take the subject of my last article for Seeking Alpha, LGI Homes (NASDAQ:LGIH). That little company is poised to grow like a weed, and yet Wall Street has barely noticed it. Only five analysts have initiated coverage. Meanwhile, Chipotle has twenty-four analysts covering it. Twenty-four! That's almost twenty-four too many in my book.

Long story short, Chipotle's high multiple and heavy coverage made me nervous and a bit trigger happy. During a brief sell-off, I unloaded half my Chipotle shares when the stock dipped below $500. Of course, it quickly reversed course and went back up again, so I was already ruing that decision. Then came yesterday's earnings, which sliced, diced and flambéed Wall Street estimates. It's late in the morning West Coast time as I write this and CMG is already up $73 on the news.

Here's the thing about companies like Starbucks and, perhaps, Chipotle: they defy the normal metrics used to evaluate companies and stocks. As I write about in my book (which is due out in January from Palgrave Macmillan but is available for pre-order now!), these sorts of businesses are extremely rare. They might only come along once or twice in an investor's lifetime. The trick, of course, is to identify them amid the ocean of pretenders. Obviously, after thirty years in the business, I'm still trying to figure out how to do that.

I'm about to go out for lunch. I think I'll order a big fat helping of crow.

(*It looks like some other people in the business are starting to compare Chipotle to Starbucks. One of the two dozen analysts covering CMG did so yesterday.)

Disclosure: The author is long CMG, LGIH. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Source: I Should Be Savoring Chipotle's Amazing Earnings; Instead, They Almost Made Me Lose My Lunch