Chipotle Mexican Grill, Inc. (CMG): Chipotle Stock Might Not Be Spicy Enough

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Is the E. coli scare over for Chipotle Mexican Grill, Inc. (NYSE:CMG)? While the company has cleaned up its act, Wall Street is waiting to see if customers have returned. And it should find out after the close tomorrow, when CMG releases its second-quarter earnings report. If the company can set things right with earnings, Chipotle stock has the makings of a solid contrarian play.

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Diving into the numbers, Chipotle is expected to post a profit of 94 cents per share in the most recent quarter, with analysts’ targets dropping from $1.60 per share three months ago. Sales are seen arriving down 12.1% year-over-year at $1.05 billion. Historically, CMG posted its first quarterly loss last quarter due to an E. coli outbreak traced to its food, so a firm bounce back here is important.

Turning toward the sentiment picture, the brokerage community is leaning heavily bearish on Chipotle stock. For instance, data from Zacks reveals that CMG has attracted just eight buys, compared to 13 holds and three sells. Furthermore, the 12-month consensus price target of $456.21 represents a meager premium of just 9.8% to yesterday’s close.

Elsewhere, short sellers are gearing up ahead of this week’s report. During the most recent reporting period, the number of Chipotle stock shares sold short jumped by 14% to 4.47 million. This short position represents a more than 15.5% of the stock’s total float, creating the potential for a short-squeeze situation should CMG rally following earnings.

As for options traders, the bears are running rampant in the options pits as well. Currently, the July/August put/call open interest ratio arrives at 1.07. However, this ratio balloons to 1.27 in the weekly July 22 series, with puts easily outnumbering calls among options most affected by Chipotle’s quarterly report.

Chipotle Stock
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Overall, weekly July 22 series implieds are pricing in a potential post earnings move of about 7.3% for Chipotle stock. This places the upper bound at $445.47, while the lower bound lies at $484.53.

Technically, CMG stock has reclaimed support at $400 and its 10-day and 20-day moving averages, but its 50-day and the $420 region lie just overhead and could create significant resistance.

2 Trades for Chipotle Stock

Put Sell: With a budding technical rebound and a wealth of potential sideline money (i.e. plenty of bears to convert into bulls), there certainly is potential for a significant rally. However, I’m not willing to take a risk on fickle consumers flocking back to Chipotle right now. Maybe guidance will be the thing kick’s Chipotle stock higher?

For those looking for a neutral-to-bullish stance on CMG, a weekly July 22 series $380 put sell has a good chance of finishing out of the money when these options expire at the end of this week. At last check, this put was bid at $3.10, or $310 per contract. On the upside, you keep this premium as long as Chipotle stock closes above $380 when July 22 series options expire. On the downside, should CMG trade below $380 ahead of expiration, you could be assigned 100 shares for each put sold at a cost of $380 per share.

Put Spread: For those traders wanting to side with the bears heading into earnings, an Aug $400/$410 bear put spread has potential. At last check, this spread was offered at $4.51, or $451 per pair of contracts. Breakeven lies at $405.49, while a maximum profit of $5.49, or $549 per pair of contracts, is possible if CMG closes at or below $400 when August options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/07/chipotle-stock-cmg-q2-earnings/.

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