Chipotle Mexican Grill Inc. (CMG, Financial), the restaurant chain that could do no wrong a few years ago, has become one of the most hated stocks on the market. The stock started sliding as food safety issues plagued the company in late 2015, and after a brief recovery in early 2017, the stock is back on a downhill slide.
The stock broke the crucial $400 level it held for most of the food safety crisis, but subsequently dropped to $300. Chipotle lost nearly 40% of its value between May and August, when it moved from $495 to the current near-$300 level. The company had a fair share of bad news that trickled in during the period: one of its restaurant was closed due to a norovirus incident and there were concerns about rising avocado prices.
But does that warrant a 40% drop?
Chipotle reported second-quarter comparable store sales growth of 8.1%, which is way better than the industry average during the period. According to Black Box, comparable store traffic for the restaurant industry in the last three months was horrible, declining 4.7%, while comparable store sales declined 2.8%. One can argue Chipotle’s loss last year helped it achieve better comparable store sales results this year, which is true to some extent. But 8% growth when the industry as a whole declined does suggest the company has the ability to deliver.
One reason the norovirus incident hurt sentiments was due to the expectation sales would drop in the subsequent quarter, as negative news will typically have an impact on people’s decision to dine at the restaurant. Chances are a majority would rather avoid the restaurant than risk getting sick. What separates the recent incident from the widespread outbreak in 2015, however, is the illness was an isolated incident originating from one location. Regardless, as Bloomberg reported, even though norovirus is a fairly common occurrence, the "feeling of deja vu" was enough to send the stock down.Â
The stock decline was clearly an overreaction to the incident. It might take few more quarters for the incident to leave people’s minds, and a few more years for Chipotle to put this all behind it.
As we have seen over the last year, volatility will remain high, with Chipotle moving sharply lower on bad news and slowly moving up with positive quarterly results. Investors should take advantage of these dips to buy into the stock. There is a large margin for error at the current price point, so investors should exploit the advantage.
Disclosure: I have no positions in the stock mentioned above, and no intention to initiate a position in the next 72 hours.
