Chipotle Mexican Grill Inc. (CMG) has been one super-sized success story over the last few years. But after CMG stock posted unappetizing earnings two weeks ago, investors may want to find a new favorite restaurant.
Sure, Chipotle has a powerful brand with some consumers. But Wall Street doesn’t care about the touchy-feely vibe or how good a product is; it cares about whether your stock trades for a fair price and whether the growth will continue as expected.
Both of those factors are working against Chipotle stock now.
Just take a look at the last month or so and you’ll see a waterfall drop for CMG stock. Shares are firmly beneath the 50- and 200-day moving averages, and that kind of technical downtrend is hard to reverse.
Throw in a possible E. coli outbreak and general market uncertainty, and it’s hard to think that new money should be chasing CMG stock now.
But just in case you’re thinking of taking the plunge into Chipotle stock on hopes of a rebound, here are three big reasons to avoid the burrito biz right now:
Slowing Sales: On the surface, Chipotle’s Q3 report looked good. Same-store sales were up 2.6%, and revenue grew 12.2% overall. However, those numbers are down dramatically from the recent past. Consider that in the third quarter of 2014, same-store sales were up a mind-blowing 19.8% on revenue growth of 31.1%. CMG stock is simply failing to live up to expectations it had created over the past few years.
Sinking Margins: As InvestorPlace assistant editor John Divine put it right after earnings, an equally important story besides slowing revenue are sinking margins. Earnings of $4.59 per share fell short of forecasts of $4.62 in large part because operating margins fell 50 basis points on increased costs. “This sort of thing could be a lingering problem for CMG stock — and others in the retail and restaurant industries — as a push for higher minimum wages gains national traction,” Divine wrote.
Price Problems: Building on that last thought, Chipotle has little ability to juice results by simply doing more from existing operations. At another company, if margins were a concern, management could just raise prices, but prices have already jumped 10% this year in some markets. According to FastFoodMenuPrices.com, a steak burrito or bowl at Chipotle goes for an average of $9.83 in New York, $9.60 in California and $10.05 in Washington, D.C. How much does this chain think it can boost prices before it starts to lose customers, particularly given its issues with ingredients lately?
No Upside Left for Chipotle Stock
There are plenty of other reasons to be bearish — the E. coli buzz that I mentioned, the continued problems with carnitas thanks to supply chain issues, questions of whether the Chipotle menu is indeed any healthier than McDonald’s (MCD) when steak burritos with cheese and sour cream can easily top 1,000 calories….
But the biggest reason to be a bear is history. Because momentum in stocks like these always ends, and ends badly.
Sure, Chipotle stock soared 200% in the past five years (at least up until the earnings debacle) to outperform the S&P 500 two-fold. But I challenge you to find a fast-growing chain that hasn’t seen this kind of flame-out.
Some can and do come back, with Starbucks (SBUX) the prime example of the past decade or so. But others, like Krispy Kreme (KKD,) struggle mightily to make it back in Wall Street’s good graces.
I do believe Chipotle is more a Starbucks than a Krispy Kreme, but that doesn’t mean you should buy and hold through what could be an ugly downturn.
Don’t mess around with Chipotle stock in 2016 given the brutal earnings, technical breakdown and history of stocks like these wandering in the wilderness.
If you have a nice profit in CMG stock, take that money in run. And if you’re a new investor, don’t consider this battered burrito play a bargain.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
