China, Chipotle Share a Perilous Burden

It’s not about growth — it’s about expectations

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China, Chipotle Share a Perilous Burden

Some crash sooner than others. And some bounce back after a few years like CAKE did, while others languish at the bottom like KKD. But the fact is all of these restaurants saw a big run-up followed by a big crash.

Why? Well, because you can only juice earnings and sales for so long by opening up new restaurants. After all, retailers always reference sales at locations open for at least a year as their benchmark for a reason. “Grand opening” hype and promotions naturally inflate sales for any enterprise — and a fashionable new restaurant opening up new locations every week is riding its novelty much more than its core business model.

And when stores can’t open up fast enough and the bloom is off the rose, that initial surge wanes. It doesn’t matter if the restaurant is profitable or growing substantially — it’s all about expectations. And if expectations remain persistently high, the sad reality is that the growth eventually is going to fall short.

Which leads me to Chipotle’s chart.

cmg China, Chipotle Share a Perilous Burden

And Chipotle’s earnings performance against forecasts.

cm earnings China, Chipotle Share a Perilous BurdenSure, CMG is still growing. But it’s barely keeping up with expectations. And as history has shown, you don’t want to be the last investor to learn that the company has peaked and is on the downswing. These momentum stocks crash fast when they stumble.

I’ll readily admit that I have been dead wrong on Chipotle for some time, including a bonehead call that CMG was a short back in December. Shares are up 28% year-to-date, proving me painfully off target with that call.

I’ll also admit that some momentum stocks keep their mojo — most notably Apple (NASDAQ:AAPL), which always manages to find a way to beat expectations and suck in even more sales and profits despite its already massive reach. A rapid run-up isn’t always a sign of disaster.

However, CMG isn’t reinventing the smartphone here. It’s dishing up burritos and opening up new restaurants. So you have to ask yourself what it is beyond the rapid share appreciation and the previous sales growth that is really attractive about this stock.

Because as China has proven to us, simply growing and delivering profits isn’t enough. In the end, it’s all about whether Wall Street expects things to go up from here — and I remain convinced that by the end of 2012, investors will realize that the red-hot run of Chipotle has run its course.

What goes up must come down. Don’t be stuck holding the bag.

Jeff Reeves is the editor of InvestorPlace.com, and author of “The Frugal Investor’s Guide to Buying Great Stocks.” Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, http://investorplace.com/2012/04/what-china-and-chipotle-cmg-have-in-common/.

©2014 InvestorPlace Media, LLC

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