The hits just keep coming for Chipotle Mexican Grill, Inc. (NYSE:CMG), and I’m not referring to the good kind. The overarching theme for CMG stock is that the company simply cannot get traction. Skimping on food safety and giving diehard fans violent diarrhea will do that to an organization. While CMG is certainly not the only company that incurred a safety violation, its lingering specter and the food service industry’s heightened risk structure makes Chipotle stock as unattractive as ever.
Let’s start with the most recent ugly incident. For its third quarter of fiscal year 2016 earnings report, CMG stock cratered. Against a consensus earnings-per-share target of $1.59, the fast-casual eatery only eked out 27 cents.
As a result, Chipotle stock suffered its worst single-day loss in almost a year, according to Bloomberg. Clearly, the comeback effort failed in the most miserable way. To somewhat mitigate damages, the CMG management team announced their expectations of a return to high growth in 2017.
As any economist will tell you, there’s a big difference between “want” and “demand.” You can want anything in the world. Demand, though, has real leverage behind those desires. Essentially, this has become the argument for CMG stock. If one repeats the prepared corporate tagline long enough, maybe people will begin to believe it. Then again, maybe not.
Obvious Problems Plaguing CMG Stock
Any discussion about Chipotle stock has to incorporate the giant pink elephant in the room — CMG is still reeling from its foodborne illness controversy. Until it shakes off that painful stigma, the markets are not going to be a fun place. More importantly, the optimism that the CMG organization has towards its nearer-term prospects is misplaced.
Last month, I presented compelling data that Jack in the Box Inc. (NASDAQ:JACK) shares also experienced a resurgent bout following their food safety violation before eventually collapsing. JACK stock plummeted around the fourteenth month after its outbreak incident. CMG stock is about to cross into this notorious milestone. Worse yet, the technical pattern between JACK and Chipotle stock looks eerily similar.
When I wrote the aforementioned article, I made the caveat that CMG was not guaranteed to follow the same path that Jack in the Box took. But that was before Donald Trump became President-elect! Now that he and the Republicans will have full control of our government, I suspect that Chipotle stock will not have the happiest of endings.
That’s because Trump’s campaign promises — if indeed he sticks to them — will pressure CMG stock. Food price deflation has been a major problem for farmers and producers. This will be an ongoing headwind throughout Trump’s presidency as he made his hawkish stance loud and clear. While deflation might help restaurants, the cost savings are spread to everyone. Financially healthy competitors can drop their prices and put the squeeze on CMG stock.
What’s the Point of Chipotle Stock?
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An even more fundamental problem isn’t what the competition is doing — it’s that they simply exist.
For investors seeking a global brand that can fight for the long haul, there’s McDonald’s Corporation (NYSE:MCD). If a fast-casual option is sought, Panera Bread Co (NASDAQ:PNRA) would fit the bill. For a traditional restaurant opportunity, Darden Restaurants, Inc. (NYSE:DRI) is the most obvious choice.
All three of these stocks have shown tremendous nearer-term momentum. As a result, they’re all in the black year-to-date.
In other words, market buyers would be hard pressed to see what the point of Chipotle stock is. The food production industry is in shambles. Grocery stocks have been slammed. The restaurant industry is notoriously cutthroat without these distractions. So if an investor even wanted to take a stab at the sector, she or he would go with stability.
Bluntly speaking, that’s anything but CMG stock.
The writing is all over the technical chart. While other challenged food services names like Denny’s Corporation (NASDAQ:DENN) and Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) have made substantive progress over the past 30 days, CMG stock is comparatively frustrating. Yes, shares are up 14% for November. However, that only gets the company up to where it was prior to the Q3 earnings collapse.
CMG’s Long-Shot Opportunity
The news isn’t completely horrendous for Chipotle stock. CMG owns an enviable brand and its aggressive marketing campaigns are steadily bringing customers back to its doors. Of course, any plans to boost revenue will have to sacrifice profitability, a luxury that the company doesn’t have. But if they keep fighting to stay relevant, they could overcome this. JACK did it — and its incident killed people.
The critical point to remember, however, is that such a contrarian trade would have to have a long-term outlook. More likely than not, CMG stock faces further tests to the downside before it will start moving decisively higher. Its performance against the competition speaks volumes. Prices admittedly look enticing at this level, but obviously, there’s a reason why this is so.
Strange things have happened this year, so only the foolhardy would dismiss entirely the possibility of a Chipotle stock rally. It wouldn’t be a terrible idea to take a small risk at these prices. For the rest of us, there’s so much ugly caked into CMG stock. Furthermore, the potential opportunity cost involved with this investment may be too steep.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
