Chipotle Mexican Grill: Why I'm Skeptical, And Short

| About: Chipotle Mexican (CMG)

There is no doubt that Chipotle (NYSE:CMG) is a Mexican fast food chain on a serious roll. It seems like it can do no wrong as it has attained pious status on Wall Street. But how long can this momentum last until the shares collapse like a house of cards? As long as there are greater fools to snap up the shares, the bloated valuation will continue to grow even more insane. Shorts in a panic mode are not hurting matters either, as they are forced to cover at even higher prices.

Two upgrades (William Blair and Goldman) in the past week have sent the shares into new uncharted highs, but are these broker upgrades more of a "pump and dump" scenario than an actual change in fundamentals? I mean, why weren’t these guys upgrading $100 ago? They appear way late to the game. What is this sudden infatuation all about? It seems like a big red flag contrarian indicator to me. As the upgrades heat up, the company’s expectations start to reach unrealistic levels. In fact, the burrito purveyor is expected to generate earnings growth of 26.6% in 2012 (from $6.83 to $8.65) computing to a forward multiple of a staggering 41, and a unimpressive price earnings to growth ratio of a 2.40 (under 1 is considered bullish).

With 1163 stores in operation and an $11 billion market cap, Mr. Market is valuing each location at a rather absurd $9.45 million, and to make matters worse, the company owns the real estate on only 1% of its locations. Contrast that with Darden's (NYSE:DRI) 1894 locations valued at $2.5 million each (they own the real estate on 51% of their locations) and Brinker's (NYSE:EAT) 867 locations at $3.02 million each (they own the real estate on 22% of their locations) and it’s obvious that CMG’s valuation is certainly out of whack. In addition, there are some major headwinds that the market seems eager to dismiss: (1) Taco Bell is aiming at them; (2) erratic commodity prices; (3) saturation /canibalization of markets; (4) immigration/employee legal troubles; (5) perception/realization that their fare is high in calories and fat.

Bottom line: the higher the shares soar, the more risky they become. It is safe to say they have gone up too far, too fast and are vulnerable to a pullback. I am not saying this will become another NFLX, OPEN or GMCR debacle, but it has the makings of one. Greed is entering the picture, so I would tend to be fearful when others are greedy. At the very minimum, the stock is overbought and needs to cool off through some orderly and constructive profit taking. In the event of an earnings stumble, a 30% implosion right off the bat, could be in the cards.

Disclosure: I am short CMG.