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Ryan Hodges
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I've been an active swing trader since July 2004. I focus on identifying and getting long undervalued or little known prospective momentum plays and on going short when hype and exuberance has caused an equity to far exceed a 'rational' valuation by traditional metrics. I graduated magna cum... More
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  • CMG's $100M Buyback... Seriously, Why Bother?
    On February 1st, the CMG Board of Directors authorized a $100M share repurchase program.

    Why is a company who's stock has appreciated 957.28%(1) in just over 40 months and is now trading at 61.47x ttm earnings buying its stock back at these levels? Does the board see value in the shares at these prices? Based upon the accelerating rate at which insiders are selling, it doesn't appear as though they do.

    In ONLY the 2 months since the share repurchase was announced, insiders including CFO Jack Hartung and Co-CEOs Montgomery F. Moran and Steve Ells have unloaded 382,597 shares in the open market. The $100M plan would be able to buy back 250,000 shares at an average price of $400. Using Friday's close of $415.51 that cash would only be able to repurchase 240k shares. If the Board considers it prudent to repurchase roughly 250,000 shares in the open market, why, as individuals, have insiders dumped over 382k shares since the program was announced? Seriously, why bother?

    Further, with a market cap at Friday's close of $12.99B, what impact could the repurchase of $100M of stock possibly have on EPS? Keeping it simple, let's use 31.26M shares outstanding (as per Yahoo!) and let's say CMG earns $8.72 per share this year (consensus among 29 analysts as per Yahoo!). Further, let's say that management is able to repurchase the entire authorized amount of $100M worth of shares this fiscal year at an average price of exactly $400.00 (a nearly 4% discount from current levels). That would reduce the total number of outstanding shares by 250,000, bringing (crudely) the new total to 31.01M. After the repurchase, the impact on EPS would essentially be immaterial with new EPS coming in at $8.79. Seriously, why bother?

    No matter how you slice it, the Board's decision to repurchase $100M worth of CMG stock at these levels hardly appears to be in the best interest of the shareholders. That cash could fund 100-125 new Chipotle restaurants (in addition to already planned expansion) which could actually 'help' the company grow into its already extremely rich valuation. I'm really at a loss for the Board's logic and similarly, why isn't anyone in the analyst community asking the same question that I am? With insiders cashing out at a pace that in just two months already far exceeds the total buyback program and with the stock at all time highs the impact of a $100M repurchase would be negligible on 2012 eps... the whole thing leaves me just scratching my head.

    Anyone disagree? If so, please enlighten me. I'd love the insight!

    (1) Close of $39.30 on November 17, 2008 to close of $415.51 on March 23, 2012.

    Disclosure: I am short CMG.

    Mar 30 5:19 PM | Link | 7 Comments
  • Calling For LULU To Reach $100 Just Isn't Logical
    Lululemon closed out the 2011 trading year at $46.66. Today (March 26, 2012) LULU's final print was $75.23. So in just 57 trading days, Lululemon stock has appreciated $28.57 or 61.23% which equates to $4.1 billion of added market value. Yes, in less than three months $4.1 BILLION has been added to the market value of Lululemon, a company that has only generated $1.00 billion in sales over the last TWELVE months. It just isn't logical.

    Apparently a 61.23% gain in Q1 isn't enough, as many houses are raising LULU's price target. On Friday, for example, RBC Capital upped its price target to $83 from $70. But some investors are looking for even more! Seeking Alpha contributor David Jacoby is calling for $100 a share within 12 months.

    Personally, I think things have already gotten out of hand with LULU shares, but $100? It just isn't logical. I'm going to use Nike to demonstrate why:

    Per his artcile, David is calling for LULU $100 in 12 months on $1.40 billion in revenue. Keeping current shares outstanding of 143.56 million constant, LULU's implied market cap would be $14.36 billion.

    NKE meanwhile is expected to generate sales of $24.14 billion per the 20 analysts aggregated by Yahoo! and to keep the market cap 'comp' true I'll use current shares outstanding of 457.50 million against the $120.13 mean 12 month price target per the 16 brokers via Yahoo! to get an implied future market cap of $54.96 billion for Nike.

    Now, I pose the question, on what planet would it be even remotely rational to ascribe a $14.36 billion market cap to LULU, a company generating only $1.4 billion in sales when at the same time the market would 'only' value NKE at $54.96 billion while recording $24.14 billion in sales? So LULU would enjoy over 1/4th the market cap of NKE despite only recording 1/17th the sales? It just isn't logical.

    The answer is on NO planet would it be rational to value LULU at $100 a share 12 months from now... but the very sad truth is we'll probably see it right here, on Earth... because fundamentals, valuation, etc... nothing matters any more. It seems as though anyone buying LULU today is doing so only because they HOPE to find a greater fool to sell their shares to down the road for more than they paid today.

    So seriously, what rationale could possibly be used to justify an investment at current multiples? Nothing. The bulls can cite astronomical expected growth rates all they want - but I say double those expected growth rates, extend them over an even longer time horizon and the shares are still overvalued right now. There's simply too much exuberance in stocks like LULU (CMG, AMZN, CRM, etc.) these days. Why the market prices in 20 years of 25% growth (which is impossible) from day one instead of bidding the shares up over time as earnings grow is just beyond my understanding. Further, when LULU reports earnings each quarter the stock typically continues to rise. A blow-out quarter should be the mechanism by which these overvalued momentum stocks partly grow into their already outrageous valuations but instead the market bids the shares up another 8-10% making them even more overvalued than before! It just isn't logical.

    While I'd love to get short LULU, I won't. Not while irrationality is driving this bus. But that said, I could NEVER justify buying here, even though Mr. Jacoby is most likely going to be proven right in his $100 call - logical or not. So I'll miss that 33% move in LULU over the next 12 months, but at least I won't be worried that every down-tick is the beginning of the desperately needed and fundamentally justified 60% correction that Lululemon's shares should eventually see.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Mar 26 9:43 PM | Link | 6 Comments
  • Fool.com Says: "Plenty More Flame Under Chipotle's Grill." I'm Calling Bull.
    Perhaps it would have been more appropriate for Fool.com contributor Sara E. Wright to have titled her March 22nd article "Plenty More SMOKE Under Chipotle's Grill" because smoke is exactly what she was blowing up our backsides when that article went live.

    When the article first hit the site it included an error so blatantly obvious that my 86 year old grandfather would have questioned her numbers... and he couldn't tell you the difference between Dow Jones and Tom Jones. Don't get me wrong, I'm far from perfect myself and as such know that even the best of us make mistakes from time-to-time but Ms. Wright's guffaw makes me seriously question 1. her aptitude in performing/presenting/understanding financial analyses and 2. the general process by which she selects her 'thesis' - that is to say that I'd contend that she decided to present a bullish case on CMG and THEN went back and ran some calculations to back her thesis instead of first performing her due diligence and THEN formulating her argument. You might think that's just another example of the old chicken or the egg deal - but not in this case, and I'll explain why we can be pretty sure that her thesis came first.

    For starters, here is the revised article. It's NOW a fairly quick read: "Plenty More Flame Under Chipotle's Grill"

    The disclaimer at the bottom clearly states that "The Motley Fool owns shares of... Chipotle Mexican Grill" and concludes with Ms. Wright stating: "I've made an outperform call in Motley Fool CAPS." But if you read the article, she really doesn't say WHY the company is a good investment or HOW it can possibly grow into its astronomical valuation. She simply makes the statement that: "I'd say it isn't overpriced at today's multiples." Why Sara!? Also included is the rather weak claim: "Internationally, Chipotle's two new London locations seem to be quite successful..." Based on a blog post you read? Her statements are broad and sweeping and represent nothing more than her opinions, as she provides no hard numbers or analyses to back up her thesis. I for one would LOVE to know why the stock isn't overpriced at nearly 62x earnings.

    So here's what has me stewing: the author originally included a section on CMG's net income per employee and used said section as a main tenet of her bullish argument. A line that transitioned to that section remains (certainly its removal was intended but overlooked in an apparent fire-drill edit) as a remnant of the original version posted: "The company's net income per employee is orders of magnitude above the competition." FALSE. Which is why some time after the original version went live that entire section and NI/employee comparables chart was cut out while that line was carelessly left in.

    Ms. Wright indicated and talked to her erroneous finding that CMG generated ~$85k in net income per employee vs. approximately ~$13k per MCD employee. To present that to hundreds of thousands of readers makes me seriously question the author's understanding of rational comp metrics. Not that NI/employee couldn't be considered a reasonable comp, but that 85 grand per employee could be even remotely attainable in any casual dining business on any planet. In actuality CMG generates net income per employee of about $6,900, which is roughly HALF that of MCD... yet the article remained virtually untouched otherwise and did not include an alternative metric by which Ms. Wright could further (or at all) substantiate her bullish call.

    Hence, my suggestion is that Sara Wright had her thesis decided prior to digging up some financial data to back her argument, as when it was brought to her attention that the net income per employee figures were wrong and actually made a bearish case, the section was removed but the article remained live, otherwise untouched or reinforced with a replacement bull case argument.

    Again, we all make mistakes, but seriously, is there any quality control whatsoever going on at Fool.com anymore? Or is there an unspoken expectation for contributors to 'pump' Fool.com portfolio holdings? How can an author consciously present a calculation that 99% of financially literate individuals would immediately recognize as simply an impossible statistic (again, $85k in net income per employee!!!??? Come on.)? But taken further, how can Ms. Wright's argument be okayed by an editor/filter and THEN once discovered how can the article remain posted with literally NO remaining substantiation to a bull claim other than indirectly suggesting we just take her word for it?

    I'm not going to lose any sleep over the fact that I'm now more skeptical of Fool.com articles and it's 'unbiased bias', but the main motivation behind my writing this blog entry is that I'm just beyond sick of the relentless unsubstantiated bandwagon pumping that leads thousands of retail investors to buy into momentum names at all time highs when their only chance of realizing a profit is that there will be a greater fool out there willing to pay them more than they paid for their shares down the road. That sure was a mouthful... but let's face it, CMG officially stopped trading on anything even remotely close to overextended fundamentals over $100 ago.

    We've seen many great articles on Seeking Alpha over the past few weeks outlining the CMG bear case (such as Galileo's) so, at least in this post, I won't fan the flames. If you haven't already guessed, I too am in the CMG bear camp. Not because it's not a great company, but because (in my determination) the stock only moves higher on a daily/weekly/monthly basis on the back of relatively low volume. When daily volume is only 420-460k shares, the bid is pretty easily propped with 100 share orders that relentlessly come high 20-30 cents with each new print at the offer. Sellers aren't stupid, they will gladly sell higher. Buyers? Well I'll borrow a page from Sara Wright's book and hope that anyone reading this just takes my word for it: NO ONE is initiating a position or genuinely accumulating CMG at $415.50/share... any buying is an algo, fund, or trader most likely just massaging the L2 quote box and methodically driving the stock higher to benefit their much larger position accumulated 100s of points ago.

    In full disclosure, I do own 3 very overpriced May 2012 420 puts at $18.00 each. Having learned years ago that irrationally (in my estimation) valued stocks can become even more irrationally valued far longer than I can remain solvent I only hold that one relatively small position... as an educated, rational individual I would love to have a Seeking Alpha contributor, a Wall St. analyst, a StockTwits microblogger - ANYONE - actually provide a bullish argument for CMG that indicates via facts, figures and future growth expectations that it would indeed be wise to pay 2.5-3x earnings growth for this burrito beast. Upgrades made on the basis of relentless stock price appreciation instead of fundamentals are just ridiculous.

    In future posts I'll get into how it's financially and environmentally (competition, self-cannibalization, etc.) improbable that even if the stock were to stay pinned at $415.50 for the next 5 years, the company simply could NOT grow into its current valuation over those 60 months. It feels to me as though once reality does set in, CMG will be yet another example (NFLX, OPEN, GMCR, SODA, TZOO) of Staircase Up, Elevator Down price action.

    I look forward to your comments.

    Disclosure: I am short CMG.

    Mar 26 1:14 AM | Link | 2 Comments
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