Chipotle Mexican Grill: What Happens When Momentum Stocks Crack

I’ve been interested in Chipotle Mexican Grill (CMG) for quite a while now.  The company has a location on Douglass and Sierra College Boulevard a couple miles from my house, and I’ve been eating there for years. 

I remember when it filed to go public in Jan. 2006 and I was trying to decide whether to pick up shares.  As the stock surged from its IPO price of $22 all the way up to $155 on December 31, 2007, I continually kicked myself for not buying in.

However, I also knew that, at some point, the stock would crack (I was short shares when I wrote, “Can Chipotle Continue To Rip?” on October 30, 2007, ahead of its third quarter earnings release).  These hot, momentum stocks always do.  Even ones with tremendous fundamentals and a great long-term story like Chipotle.

And Chipotle has certainly cracked.  After reporting second quarter earnings after the close on Wednesday, including a falloff in same store sales growth to 7%, on Thursday morning, Chipotle shares were selling off down to $68 - off 56% from its high reached Dec 31, 2007 (CMG 1 Year Chart).

On Thursday morning, three analysts (Jefferies, JP Morgan, and RBC Capital) downgraded Chipotle from 'Buy' to 'Hold.' Oh, how the pendulum swings in our seamlessly rational, perfectly efficient capital markets. 

Chipotle shares are starting to look interesting to me here for a potential bounce.  The company is now at a 52-week low, is 40% below its 200 day moving average, and 56% off its highs from Dec. 31, 2007. 

Valuation is even reasonable here with shares trading for about 22 times next four quarter earnings once you back out the $200 million in cash on its balance sheet.  That appears to be about Chipotle’s current growth rate so valuation has really gotten back into line after being completely ridiculous.

Disclosure: Top Gun has no position in Chipotle shares.

Comments

[j-dub:]

Excellent article Greg and, as a sidenote, excellent call on the financials-your rational and succinct blogs on UYG ultimately led me to take a position which led to a high five figure gain in the UYG and BAC in the last wo weeks. Your call cut through the ton of emotion that most investors would have in a time of high volatility and I thank you.

As far as a position in CMG goes, everything you mention is logical, so the question remains as to where the entry point is. If you want to become a long term (over 18 months) investor in this company, I would vonsider a technical approach which would include a 40% total position at these prices, another 40% around 58, if it gets there, while saving the last 20% if if falls below 55.
If you are looking for a short term bounce at a relatively safe downside risk, I would consider puting 50% in around 58 with an additional 50% below 55.
KEEP UP THE GREAT ARTICLES

2008 Jul 26 05:25 PM