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Play of the Day: Look for CMG momentum to slow

|Includes: Chipotle Mexican Grill, Inc. (CMG)

Guest Analyst: Tim Biggam, TradingBlock  (July 5, 2011, 3:48pm CDT)

Symbol Analyst Target Price Target Date
CMG $282.00 Dec. 15, 2011

As of December 31, 2010, Chipotle Mexican Grill, Inc. and its subsidiaries (Chipotle; ticker: CMG) operated 1,084 restaurants throughout the United States, Toronto, Canada (2) and London, England (1). The Company manages its operations and restaurants based on five regions that all report into a single segment. The Company delivers ingredients and other supplies to its restaurants from 22 independently owned and operated regional distribution centers.

CMG has been a beast of late, moving from 212 to over 320 so far this year, a gain of over 50%. Over the past ten trading sessions alone, the stock has moved nearly 50 points. While the most recent earnings report pointed to continued growth in net income of 26%, the stock is now sporting a TTM P/E ratio of 53, with the concomitant PEG of over 2. CMG also sports a lofty price to sales ratio of 5:1, with a price-to-book ratio over 11.

While it’s difficult to predict when momentum stocks like CMG will falter, at some point valuations do matter. It’s the law of large numbers- the larger the market cap becomes, the slower the growth rate simply as a function of size. The Internet Bubble of the late 1990s taught us this lesson very well.

We look for a multiple contraction in CMG to the 40 level over the next two quarters, putting our year end price target at 282, based on consensus 2011 estimates of 7.05.

Play of the Day

Based on the Chipotle's (ticker: CMG) current market price of $321.45 and using a target price of $282.00, a target date of December 15, 2011 and $10,000 of investment capital, below are three options strategies (ranked by potential profit) and a comparative stock trade to consider should the price target be achieved at the target date.

Click on the strategy name below to access trade details using TradeBuilder on Powered by TradingBlock's TradeBuilder.

Strategy (click for details) % Return at Target Probability of breaking
even or better
Sell Dec Call Spread +75% 43%
Buy Dec Strangle +33% 41%
Buy Dec Iron Condor +20% 69%
Sell Stock +12% 43%

* Subject to change due to changing market conditions.Click here to view risks regarding selling stock short.

DISCLAIMER: This content is provided for educational and informational purposes only. Evaluate any strategy prior to use to understand risk and suitability. TradingBlock does not endorse or warrant any Market Analyst content, service or product. Use this content at your own risk without guarantee or warranty of any kind from TradingBlock. Tim Biggam is a TradingBlock registered representative. He is not compensated by TradingBlock for any market research or analysis services.