Chipotle Mexican Grill (NYSE:CMG) is on the menu of many momentum stock investors these days. The booming burrito joint continues to post big improvements in profit and revenue — and most importantly, in CMG stock valuations. Chipotle stock is up almost 60% in the past 12 months to put it up against a new 52-week high.
But a new offering from rival fast-food chain Taco Bell and its parent Yum! Brands (NYSE:YUM) could give Chipotle a run for its money.
A menu that admittedly is a rip-off of Chipotle’s model — featuring make-your-own burritos boasting black beans, corn salsa and cilantro rice — is being tested in about 75 stores right now. And the so-called “Cantina Bell” offerings are blowing up, according to reports from inside Taco Bell.
“If it makes sense, I’d love to get Cantina Bell across the country in the second half of this year,” Taco Bell Chief Executive Officer Greg Creed told BusinessWeek recently.
Skeptics will say that Taco Bell is the lowbrow cousin of Chipotle and wouldn’t know premium Mexican food if it was slapped in the face with it. This is, after all, a fast-food joint that recently rolled out a taco featuring a crunchy nacho cheese Doritos shell, tying up $75 million in advertising and installing new machinery at four PepsiCo (NYSE:PEP) plants (which owns the Doritos brand under its Frito-Lay division) just for the fad.
Taco Bell also is cooking up breakfast burritos in a mad dash for early morning cash.
But there are reasons to think that Yum! may succeed in this effort, even if the other fad menu items don’t do so well.
For starters, there are about 5,670 Taco Bell locations in the U.S. Chipotle still has fewer than 1,500 — and while it is growing fast, there are many areas where Yum! Brands will have the market cornered if it just adds this new Cantina Bell menu to its current stores.
Furthermore, Yum! has the scale and distribution network to keep down rising commodity costs and to offer a competitive price. Beef prices were up over 10% last year, and could rise another 5% in 2012, so keeping margins healthy is a key part to winning the fast-food war.
Along the same lines, the Cantina Bell items are priced at about $4.99, significantly cheaper than Chipotle’s items that typically cost $6 to $7 per meal. That should help appeal to cash-strapped consumers.
In the interest of full disclosure: I have been scratching my head over Chipotle for quite some time. In December, I was bearish on the stock at $320 … and now CMG has added about 25%, double the 12% gains of the S&P 500 in the same period.
I am the first to point out that I have been proven wrong in the past about Chipotle’s staying power, and I readily admit that CMG could prove me wrong again. Revenue and profits have marched up every single quarter since before 2008, proving that Chipotle has room to grow and has not run out of momentum yet.
Still, traders should watch the cautionary tales of other fast-growing stocks like Netflix (NASDAQ:NFLX) after the Qwikster debacle — and more recently, Green Mountain Coffee Roasters (NASDAQ:GMCR) this month. GMCR took a dive on news that Starbucks (NASDAQ:SBUX) is launching a competitor to the Keurig and Green Mountain’s profitable K-Cup technology. One misstep or bad news item is all it takes.
Investors should remember this before they pile into Chipotle at $400 a share. Even if Yum! Brands and Taco Bell don’t take down Chipotle, keep in mind the jaw-dropping momentum of stocks like Chipotle also works in the other direction when things go south.
Jeff Reeves is the editor of InvestorPlace.com. Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.