GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Chipotle Mexican – Another Wake-Up Call That Came Too Late

July 20, 2012 | About:
CMG shares are down more than 22% mid-day Friday after reporting better than expected June quarter results. Apparently analysts didn’t realize Mexican food contained corn, with a surging cost, or that economic conditions were not conducive to future strong quick service restaurant sales growth.

From the 2012 high of $442.40 CMG is now off by about $130 per share. Why should this shock anyone? Momentum traders who paid that April peak price were laying out 50.3x projected EPS of $8.80. That put the earnings yield (the inverse of the P/E) at 1.99% based on the forward estimate. How excited should anyone have been at the prospect of getting less than a 2% after-tax return on investment? That meager return was predicated on better than 30% year-over-year growth this year.

If it’s any consolation to those licking their wounds today you could note that in late 2007 even crazier traders paid 73x trailing earnings for CMG. While that eventually worked out for the buy and hold crowd you would have had to sit tight while the stock declined by 76% from $155 to $36.90 in November 2008.

cmg-per-share-data-and-price-action-2005

Non-momentum value- oriented investors could have scooped up the same shares at 12x – 16x projected earnings in late 2008, early 2009 and then once again at the beginning of 2010. The same shares were great buys at the right price and horrible trades when too expensively priced.

After today’s drop CMG is only inexpensive when compared to the grossly overpriced valuations seen during late 2007and in 2011 – 2012 YTD. I would advise staying on the sidelines unless we see a much bigger sell-off.

Buy the burritos and tacos but wait on getting the shares ‘to go’.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com
http://www.MutualFunds.com

Visit Dr. Paul Price's Website


Rating: 3.0/5 (16 votes)

Comments

esmerelda777
Esmerelda777 - 2 years ago
I was dissuaded from buying a put option this past Thursday for $360 (the price was hovering near $400) because of two pieces of news. I read that CITI had 'upgraded' CMG, and Reuters was mentioning how options activity was "bullish" that same Thursday right before earnings. That, and seeing the stock actually go UP, so I thought why throw money away on that option. The put contracts were actually going down in price, and I could have made a few grand if I'd bought just one. I'm not sure if I should suspect any media manipulation or if these pp writing the articles truly believed that CMG should be so high. I should have listened to myself, not them.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK