Chipotle Mexican Grill, Inc. (NYSE:CMG) has been flaming out in marvelous fashion. CMG stock is down almost 30% since its October highs, and at its lowest levels since mid-2014.
The reasons for the declines in Chipotle stock are numerous. And unfortunately, all of those reasons have come in a small window of time.
The latest bit of bad news came in the form of another shot against the fresh and healthy brand Chipotle has worked so long to cultivate: an announcement that it will use fewer local ingredients, and more centralized preparation.
Much of the CMG stock hype over the last few years has been tied up in the company’s favorable image compared with fast-food giants like McDonald’s Corporation (NYSE:MCD), Wendys Co. (NASDAQ:WEN) and Yum! Brands, Inc. (NYSE:YUM).
But if customers see Chipotle as a more expensive alternative that isn’t that much healthier … well, what’s the incentive to dine there?
And if investors see CMG stock as the same old restaurant company … well, what’s the incentive to pay a big premium on earnings?
CMG Stock Is in Deep Trouble
Here’s a short list of things working against Chipotle stock right now, and why investors should steer clear.
In October, Chipotle earnings disappointed in a big way. Yes, third-quarter revenue for CMG stock was on target, but Wall Street was looking for $4.62 in earnings per share and only got $4.59 thanks to growing cost issues and weakening margins.
Furthermore, as I pointed out over a month ago as the mayhem started for Chipotle stock, growth rates have simply fallen off a cliff. Consider that in Q3’s Chipotle earnings report this year, same-store sales were up 2.6% and revenue grew 12.2% overall … but in the third quarter of 2014, CMG saw same-store sales growth of 19.8% on revenue growth of 31.1%.
Since then, investors have been concerned about E. coli and norovirus reports that have led to dozens of restaurant closures.
As a result, Chipotle is now predicting a drop in same-store sales this quarter, its first ever since going public in 2006.
Problems with brand are one thing, and investors may be able to shrug off concerns about perceptions. However, the fundamentals of the business are breaking down — and at a time when investors had been paying a big premium for growth in CMG stock.
What’s Next for Chipotle Stock?
As InvestorPlace chartist Tyler Craig recently pointed out, investors shouldn’t be taken in by a brief rally in CMG stock off its December lows. The run barely brought Chipotle back in line with its short-term average, and options activity is still hinting at further declines ahead.
What’s more, given the waterfall decline since October, it’s clear that sentiment has rolled over in a big way. And as anyone who has watched momentum stocks like CMG knows, when the bright future of a fast-moving stock like this suddenly starts to fade, the resulting correction is not short-lived but a dramatic period of volatility that can last for months or even a full year until the momentum play finds its footing once more.
The one thing that’s for certain is that Chipotle stock will never be the same. Sure, it’s going to survive and probably going to eventually be a good investment once more. However, once a high-growth cult favorite hits a wall as it transitions from superstar to a mature player, investors need to adjust their expectations and top treating the company the way they did when it was a glorious mid-cap with amazing earnings.
The problem for Chipotle is that its inevitable metamorphosis from an up-and-coming player to a mature restaurant stock has happened at the very same moment that serious supply chain issues are driving up costs and damaging the brand.
That is not a recipe investors should mess with, and CMG remains a sell until the dust settles — probably well into 2016.
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.
