Contrarians nibbling on some Chipotle Mexican Grill, Inc. (CMG) stock at this point certainly can’t be faulted, but we wouldn’t try it without ordering a limited risk vertical from the options menu on CMG.
Unless you’ve been on Mars, you’re aware of the E.coli and Norovirus outbreaks at Chipotle late last year as it’s been regular fodder for a media food chain always hungry for a good story.
As a corollary, many investors know the impact various federal investigations, lawsuits, slashed earnings and sales forecasts, as well as price targets and downward ratings revisions over the past couple months have had on Chipotle stock.
The tables have been literally turned upside down on the market’s best growth stories of recent years, with Chipotle stock shedding in excess of 45% since October.
The good news in all of this is, though intestinal fortitude is required, shares of Chipotle stock haven’t been this cheap since the darkest days of the financial crisis.
One could argue growth prospects for the then newer concept Chipotle chain were stronger in 2008 and the current company-specific news is more of a threat to CMG stock’s ability to rebound.
But these types of problems, though painful in the short term, typically wind up being opportunities for investors. And given that Chipotle’s management has been very open, quick-to-act and fully cooperative, Chipotle stock is likely to create even greater shareholder value.
Chipotle Stock Monthly Chart
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The selling of the last three to four months has put CMG into an area of technical value. Shares of Chipotle stock are now testing its long-term uptrend line and 50% retracement level as part of its deep-value correction of around 45%.
On the one hand, Bulls may also look to highs in Chipotle stock set back in 2012 as potential support.
On the other hand, a failure to hold technical support could result in another leg down in CMG to the $300 to $315 area and home of the 62% level.
Personally, that’s not a ride worth staying long shares of Chipotle stock.
Chipotle Stock Trading Strategy
Reviewing the Chipotle stock options board, the CMG Feb $410/$435 bull call spread for up to $10 is attractive.
Risk is limited to the price paid and for $10 per spread, the trader could realize a profit of $15 or 150% return at February expiration if Chipotle stock is higher by about 7% and above the sold $435 call.
Using a CMG spread like this also reduces volatility and time decay risk and allows the trader to breakeven at a lower level in Chipotle stock compared to an outright purchase.
Lastly, as earnings are slated for Feb. 2 and as mentioned, we’re not keen on maintaining stock-like risk should the current lows fail to hold — this vertical is a healthier way to order from the CMG menu with far less risk than owning Chipotle stock.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
