I have been bearish on Chipotle Mexican Grill (CMG, Financial) for a few months now and remain so. The stock is overvalued, and investors are not pricing in the current headwinds. I can see Chipotle Mexican Grill falling below $400 once again in the coming months, which is why investors should either sell the stock and wait for a better entry point or short it to gain about 15% profit.
Wasting money
Ever since the E. coli breakout, Chipotle has wasted about half of its cash reserves on buying back shares. The buyback has been the primary reason why shares of the company are still overvalued. However, buybacks are only a short-term solution; shares should fall below $400 once the buybacks end.
The management is compensated on the basis of share performance, which is probably why the company has sanctioned such a massive buyback. However, as mentioned above, this is only a short-term solution, and I expect the stock to head lower.
Other factors
With Chipotle now trading at almost 30 times earnings, the stock has at least 15% downside potential. The company’s comps are falling off a cliff, whereas it is also losing money in damage control. This might even be the first year when Chipotle doesn’t see any profits.
In addition, the company has opened up new stores in order to keep the revenue growth strong on paper. The new stores have been compensating for falling sales for quite some time. However, again, this is only a short-term fix.
Chipotle will have to focus on winning back customers and will have to do a lot more than offer free burritos. As of now, the company is not on the right track.
It was recently reported that Chipotle Mexican Grill will start serving burgers to curb falling sales. However, this is the wrong strategy as the burger market is one of the most competitive spaces.
Conclusion
I do not agree with the steps that Chipotle’s management has taken over the last few months. The company will continue suffering from the ill effects of the breakouts and offering free burritos will not change that. In addition, Chipotle is making a big mistake by entering the burger space as the competition is too great for it to change the company’s fortunes. Investors should short, or at least sell, Chipotle Mexican Grill.
Disclosure: The author doesn’t have any position in the stocks mentioned in the article.
