Are Chipotle Investors Headed for Indigestion?

| About: Chipotle Mexican (CMG)
Although Chipotle (NYSE:CMG) is down 7% from its all time highs, there is the possibility of further weakness in the shares, as perceptions of higher commodity costs (food inflation last month was the highest in 35 years) and immigration labor woes continue to plague the company. In fact, with 2012 earnings slated to grow only 22.7% from $6.74 to $8.27 (CMG is getting hit with the law of bigger numbers), the stock’s PEG ratio of 2.0 is downright scary (anything above 1.0 is considered bearish) and its forward PE of 38 is no bargain either. Selling at nearly ten times book value is palatable, when considering how pristine its balance sheet is, featuring no debt and over $200 million in cash.
Are CMG’s expectations too high, making it vulnerable to a nasty selloff? Will the doubling in gasoline prices cause consumers to rethink that Chipotle visit? I think CMG faces some considerable headwinds that could easily extract 20% from the current share price, especially if the company is unable to produce nothing less than a “grand slam” when they report their 1st quarter, near the end of April.
Insiders are selling: In the last six months, insiders have sold at will, reducing their ownership by 20%. In the last month alone, both Robert Blessing and Mark Crumpacker have each dumped over $5 million worth of shares. You have to ask yourself, why are they selling? Is Management giving its “blessing” for others to hit the exits? Will there be any crumbs left to pack away for the small retail investor once the company has to absorb an unfavorable news report? All I can say, if you feel compelled to be long, be careful and use a stop to protect yourself, as stocks tend to drop twice as fast and far on fear, as they rise on elation.
Conclusion: There is no doubt that CMG is a great company, it’s just that its stock price has gotten way ahead of itself (nearly tripling the past year), leaving very little room for less than flawless execution. The stock’s risk reward ratio favors a bearish stance, because at this juncture, it seems to contain more downside risk than upside reward.

Disclosure: I am short CMG.