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Summary

  • Chipotle Mexican is overvalued but will probably go higher anyway.
  • Second quarter growth was better than it appeared if you look within the quarter.
  • Next report could be a blowout.

Look, I get that Chipotle Mexican Grill (NYSE:CMG) is or at least looks overvalued. I'm looking to short it at some point myself. But if I see one more bad premature shorting call I'm going to rip my hair out.

There is an old saying on Wall Street to never step in front of a moving train. Chipotle's earnings last quarter, as you are probably already aware, were out of this world fantastic. Revenue, same-store sales, and net income exploded 29%, 17%, and 26% respectively.

For those of you unfamiliar with retail or restaurant stocks, same-store sales growth is a traditional measure of how much more popular a particular brand has gotten. Typically anything between 5% and 10% is fantastic for any restaurant. For large chains, it's especially good as showing even higher sales on a percentage basis is simply a mathematical challenge. 17% though, for a large chain that is already doing very well, is simply unheard of.

But does any of that justify a P/E ratio in the 60s on what may prove to be long term a fad chain? Probably not and with the shorts I agree. Another Wall Street saying comes to mind, however -- the market can stay irrational longer than a short can stay solvent.

I wouldn't be surprised with another blowout quarter next report with another rally. During the last conference call, CEO Steve Ells stated,

"Not only were we able to continue the momentum we saw in the first quarter and late in 2013, we actually accelerated our momentum in the second quarter."

Yes, that means what you think it means. The 17% same-store sales figure was an average over the entire quarter but was actually higher in the later part of the quarter than the beginning. And the fact that Ells pointed out could very well (or probably does) mean that momentum did indeed continue into the current third quarter and investors may be seeing more shock and awe ahead. That's not something very healthy for short positions.

Finally the guidance calls for same-store sales in the "mid-teens." Given Chipotle's track record of under-promise and over-deliver, there is a risk for shorts of that guidance and the 17% of the second quarter getting blown away for the third quarter. I don't want to be short Chipotle going into that report, regardless of valuation.

While I'm not 100% convinced that Chipotle will be going higher, I'm 100% convinced that the short thesis at this time is far too risky. I'll be joining you folks eventually, but now is not the time.

Source: Chipotle Mexican Grill Shorts Are Gluttons For Punishment