Chipotle Stock Keeps Getting Eaten Alive — Sell CMG Now!

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Chipotle Mexican Grill, Inc. (CMG) has been in a tough spot since its recent earnings report. Shares of Chipotle stock are down about 15% from their mid-October peak.

Chipotle Stock Keeps Getting Eaten Alive -- Sell CMG Now!More recently, CMG stock is off more than 4% since last week on fears of an E. coli outbreak at the chain. But in many ways, this selloff of Chipotle stock is just as much a part of the downtrend since earnings as it is a response to the headlines.

So what’s up with CMG stock, and how should investors play this recent downturn? Is it presenting a bargain opportunity in Chipotle stock, or should the Mexican restaurant chain be considered one of those momentum stocks that has finally lost its mojo?

The answer, sadly, is the latter.

Chipotle Stock Is a Sell Here

For starters, the charts are just plain working against CMG stock right now. As one of InvestorPlace’s technical analysts, Tyler Craig, recently put it:

CMG stock remains firmly beneath all major moving averages, giving little for chart watchers to get excited about. Until Chipotle can remount the 50-day and 200-day moving averages, any and all rallies should be eyed with skepticism.

In a momentum name like this, those kind of metrics matter for sentiment and support.

Furthermore, a look at the fundamentals shows that while revenue was in line for the third quarter, Wall Street expected $4.62 in earnings per share and only got $4.59. The miss was thanks to rising costs eating at margins, a serious concern for CMG stock over the last few years that has finally come home to roost, and investors are afraid this is the beginning of a trend of slowing earnings growth.

Sure, Chipotle could raise prices, but burritos in many markets are already around the $9 mark. How much does this chain think it can hike prices before it starts to lose customers?

When taken along with the top line, these profit concerns paint a bleak picture. After all, revenue was on the money but up “only” 12.2% in the quarter — down considerably from previous years — while comparable sales ticked up a modest 2.6%. That means CMG is dependent on new restaurants to juice growth, since old restaurants are maturing and seeing little growth.

Bottom Line

When you take the sentiment reflected by the charts with these fundamentals, it all adds up to an argument to sell Chipotle stock now.

This happens a lot to restaurant stocks, be they newly minted darlings like Shake Shack (SHAK) or old-school favorites like McDonald’s (MCD) or Wendy’s (WEN) — business matures, tastes change and growth is harder to come by than investors thought.

Considering the amazing history of Chipotle stock, with shares up 170% in the last five years to outperform the S&P 500 almost 3-to-1, it had to happen eventually.

But considering the stock still has a forward price-to-earnings ratio of more than 30 amid slowing growth and deteriorating charts … well, don’t expect we’ve seen the last of declines for CMG stock in 2015.

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

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

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