When Momentum Stocks Crack: Chipotle Mexican Grill (CMG)

I’ve been interested in Chipotle Mexican Grill (CMG) for quite a while now.  They have 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 they filed to go public in Jan ’06 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.

But 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 their 3rd 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 2nd quarter earnings after the close yesterday, including a falloff in same store sales growth to 7%, Chipotle shares are selling off down to $68 this morning – off 56% from its high reached Dec 31, 2007 (CMG 1 Year Chart).

Three analysts (Jefferies, JP Morgan, RBC Capital) this morning 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.  They’re at 52 week lows, 40% below their 200 day moving average, and 56% off their highs from Dec. 31, 2007. 

Valuation is even reasonable here with shares trading for about 22 times next 4 quarter earnings once you back out the $200 million in cash on their 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 (CMG) shares.

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