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InvestorPlace's Jeff Reeves makes the bear case for Chipotle (CMG -0.4%), calling it a "favorite...

InvestorPlace's Jeff Reeves makes the bear case for Chipotle (CMG -0.4%), calling it a "favorite to flop." For starters, he cites runaway food inflation squeezing margins and a "nosebleed" P/E ratio of 39, before lining up the historic record of restaurants that grow too fast. "The fact is you can only build so many stores so quickly to prop up growth. Eventually the market becomes saturated or the rate of expansion is no longer large enough to materially impact earnings and sales growth."
Comments (8)
  • What happens if their Shophouse concept takes off - long lines already at the DC opening?
    2 Nov 2011, 01:15 PM Reply Like
  • With all due respect to Jeff, these "reasons" are extremely weak. Here are a few things he should research:

     

    1) how many units Chipotle has and how many would actually be market saturation outside his experience in NYC.

     

    2) Chipotle's foods are organic and fresh. Sure, an entire burrito is 800 calories, but most people only eat half at a time. That's a huge amount of quality food for what Jeff considers an expensive $8. Try eating lunch at Whole Foods and that will look like a major bargain for the same amount of high quality food. Not to mention, customers are not a current problem for CMG.

     

    3) The narrow menu is what makes the concept brilliant on the back end. Chipotle is able to keep their food super fresh and keep costs low because they focus their menu. Definitely not a problem. And I don't know about most people, but when I want a burrito I don't need to have 50 other options. Mexican food can be simple. That's part of the appeal.

     

    4) PF Changs is an absurd comparison for CMG. Really? Any decent hedge fund would laugh that one out of the room.

     

    In conclusion, the only truly researched and valid point here is the high P/E. But once you look up how many units Chipotle has built and how many more the world can handle (and let me give you a hint: YUM and MCD are decades ahead in their buildouts), you'll note the growth PE can last for many more years.

     

    Contrarian is cool, but so is diligence.
    2 Nov 2011, 01:23 PM Reply Like
  • Ah, most eat half? I know a couple "kids" who have eaten two at one sitting.
    2 Nov 2011, 01:43 PM Reply Like
  • the obvious, yet most ignored, risk with high multiple stocks is that they are priced to perfection. If they continue their rapid growth, then the bulls continue to win, but if they miss or slow down even a little, then the collapse is very ugly. Although I agree with the bears on this particular situation, I understand why cramer and the rest of the bulls like this story. its hard to dislike a stock that has gone up so much. So in so many words, the bulls have to be consistently right about CMG (and other high flying stocks), with each quarter being detrimental to the price. Whereas the Bears only need to be right once. your money, your choice.
    2 Nov 2011, 01:55 PM Reply Like
  • Yreuven hit the mark. CMG has consistently unable to break $340, all it would take would be one bad news for this stock to go the way of AMZN or NFLX.
    8 Nov 2011, 09:54 AM Reply Like
  • Thanks emburns. Gmcr officially exploded today. Despite the recent pullback caused by rumors, einhorn etc, the explosion is now official bc they missed earnings. High flyers can fight rumors and win many times, but they can't fight missing the perfection that they have been priced against. At least not for another 3 months (which is a lifetime in this market).
    Disclosure: rci is short gmcr.
    9 Nov 2011, 09:18 PM Reply Like
  • Will look into selling otm puts to capitalize on such events.
    10 Nov 2011, 09:36 AM Reply Like
  • thats only if you think they're going up. I'll probably be the buyer, so let me know when and which you're selling lol. because i dont think there is even a good shot for them to rebound any time soon. there are a few big negatives that are in the works, that tend to follow such situations. 10Q (doubt it will be good for them, otherwise they would have released it), class-action lawsuit, SEC investigation of insider trading (in addition to existing one, which i assume will be taken more seriously now), major inventory write down (but thats probably months away), lowering estimates. this is just my opinion from experience for whatever its worth.
    11 Nov 2011, 05:37 PM Reply Like
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