Dump Chipotle Mexican Grill, Inc. (CMG) Before It Dumps You

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Chipotle Mexican Grill, Inc. (CMG) stabilized Monday and there’s no question that CMG will survive the E. coli outbreak that has been hammering Chipotle stock.

cmg Chipotle Mexican Grill (NYSE: CMG)But it’s still a totally unappetizing investment even after coming way down in price.

Ordinarily, the kind of big dump CMG took on the E. coli news presents a buying opportunity, if only because the market pretty much always overreacts to the downside or upside.

You don’t necessarily get a long-term buy-and-hold opportunity in such cases, but you sure are apt to get a nice short- to intermediate-term trade.

Don’t believe me? Just pull up a chart of BP (BP) in the months after the Deepwater Horizon disaster or JPMorgan Chase (JPM) following the London Whale debacle.

Besides, it’s not like the E. coli outbreak is going to put CMG out of business. Hell, an E. coli outbreak at Jack in the Box Inc. (JACK) actually killed some kids 20 years ago and that chain is still going strong.

Besides, it sounds like plenty of CMG regulars are taking the food-poisoning news in stride. As Reuters reported:

“Diners at Chipotle Mexican Grill locations on Saturday said freshness and convenience outweighed concerns about contamination following the news that food poisoning cases had erupted at the chain’s locations in six U.S. states … Brandon Doby, a 19-year-old Colgate University student who picked up food at a Chipotle in Syracuse, New York, said: ‘I’m aware of the E. coli breakout, but I’ve got bigger things to worry about than E. coli.'”

If You Haven’t Sold CMG, What Are You Waiting For?

Rather, the problems with CMG predate the outbreak of this food-borne illness. As trendy and popular as the chain may be, this stock had gotten way ahead of fundamentals that are in a state of deterioration.

As InvestorPlace noted after CMG’s most recent earnings report, sales growth is decelerating at an alarming rate.

Sure, same-store sales rose 2.6% in the latest quarter, but they grew a mind-blowing 19.8% in the same period last year. Total revenue increased 12.2% this year, which is nice until you realize the top line expanded more than 31% the year-ago quarter.

Momentum stocks like CMG are all about accelerating top-line (and same-store sales) growth. That’s the only thing that can justify the insane multiples these names commands. (Well, that and margin expansion, which is another thing CMG failed to deliver.)

CMG
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CMG stock fell off a cliff back in August — long before the E. coli outbreak — over just such concerns. The E. coli outbreak just happens to add headline risk at a time when this momentum stock had already lost its mojo.

CMG stock is off more than 17% for the year-to-date on a lot more than food poisoning fears. Where it bottoms is anyone’s guess, but do be aware that it’s on the cusp of making a death cross. (See the embedded chart, courtesy of Yahoo Finance.) That’s a technical sell signal that could easily become a self-fulfilling prophecy.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/11/chipotle-mexican-grill-cmg-stock/.

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