Chipotle Mexican Grill, Inc. (CMG) stock isn’t just recovering from the PR nightmare of its 2015 health outbreaks — Chipotle stock is actually ready to make a serious run.
Before the outbreaks, casual diners diligently marched through the doors of Chipotle on a daily basis to get their burrito fix. Similarly, investors were almost as committed to Chipotle stock as it was one of the best-performing companies in fast-casual dining. Through the first three quarters of 2015, CMG was outpacing the S&P 500 by about 14 percentage points.
But starting in October 2015, E. coli outbreaks and enhanced focus on earlier norovirus outbreaks turned investors off sharply, as Wall Street sold CMG shares off by nearly half through their January 2015 lows.
Nearly a month after the government gave Chipotle an all-clear, Chipotle stock is up about 15% — but there’s still a lot more room to run.
In fact, CMG is on track to regain its leadership role among its peers, and even the market.
Why Chipotle Stock Has So Much Upside
The a-ha moment for investors should have been the announcement that it would close all Chipotle stores on Feb. 8. More than a month earlier, the company said everything was fine, nothing to see here. However, the outbreak grew to the point where CMG’s hand was forced. Chipotle took the very public measure of closing stores for health training to assure diners that the company was serious about dealing with the crisis.
And that’s the type of no-looking-back moment that a company in Chipotle’s position needs for its stock to head higher.
Now that this fundamental trigger has been pulled, investors should be focusing on a few indicators that are flashing opportunity for Chipotle stock.
Wall Street Analyst Recommendations
So in October, 63% of the analysts covering Chipotle stock had it ranked a “buy” or “strong buy,” and this figure has since dropped to 36% (for obvious reasons). But for just as obvious reasons — namely, CMG beginning to operate “normally” again — this number is sure to rise.
The last time that Wall Street’s analysts had this low of a rating on Chipotle stock was April 2013, just after the stock had declined 47% from May 2012 through October 2012 … and right before the stock launched itself from $250 to more than $500 is a straight line higher.
Historically, Wall Street analysts have a habit of being late to the party when it comes to upgrading a stock. In this case, Chipotle’s popularity will likely have analysts ready to upgrade shares a little faster than normal. Our analysis suggests a repeat of the 2013 rally.
CMG Technical Picture
Chipotle stock is in the process of completing a bullish pattern as the stock’s 20-day moving average is moving above its 50-day moving average. For many, this may not mean anything, but for those watching the charts, it is a bullish signal that suggests a technical bottom is building and that higher prices are on the way.
The last instance of a similar technical trigger resulted in a run for Chipotle stock that took it from $660 to $760 in relatively short order. A similar run now will put CMG back on Wall Street’s radar, luring more buyers into the mix.
Our model suggests a 12-month target of $660, or roughly 30% higher from here.
Naturally, you can expect some volatility along the way, so if you’re a longer-term investor that wants to hold Chipotle stock to that level, you might feel comfortable opening a position at current prices, then adding if the stock sees weakness over the short-term. In fact, our models suggest the potential for short-term profit-taking to move CMG back to support at $480.
To us, that would just be another opportunity to buy.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
