EDITOR’S NOTE: Sam Collins is on vacation and will return on Feb. 21.
Friday turned into a feast for bearish investors at Chipotle Mexican Grill, Inc. (NYSE:CMG). And guess what? It could always get worse. But don’t let other investors’ fear and loathing prevent you from ordering a bit of strategic income or maybe a piece of very well-done CMG stock off Chipotle’s options menu. Let me explain.
By the looks of it, Friday was not a good day for Chipotle and CMG shareholders. The stock shed 4.54% after issuing a headline-grabbing earnings release whose numbing year-over-year metrics were topped off with a 2-cent miss on profits of 55 cents and in-line, but turning-the-corner sales.
Visually, Chipotle investors heading for the exits, resulted in a heavy foot traffic, bearish engulfing candlestick imprint left on the CMG stock chart by the close of trade.
And it could get worse.
Financial rag Barron’s put Chipotle on its weekend cover asking the question, “Chipotle—Can It Be Fixed?” The short answer was: don’t bother right now.
The article warned that 10% downside to perhaps as much as -35% in 2017 is still possible due to increased marketing and costly sourcing efforts for ingredients from Mexico which could get a good deal more expensive if the Trump administration’s tariff plan gets passed.
With little doubt of Chipotle’s overt bearishness both off and on the price chart, it’s our view that CMG stocks’ days in the proverbial slaughterhouse are ‘close’ to providing a nice opportunity for contrarian investors. CNBC’s James Cramer is one of the few analysts who mostly agrees.
On Friday The Mad Money host stressed companies involved in food scandals like Chipotle’s 2015 food poisoning outbreak generally require 18 months for investors to forget. While he says “so we’re not there yet”, Thursday night’s report marked the beginning of the turn for Chipotle and “if it goes below $400, buy it.”
CMG Stock Daily Chart
Amongst other items when looking at the daily chart of CMG stock, buying Chipotle shares at $400 or just 1% below current prices doesn’t altogether jibe with Cramer’s time thesis of 18 months and the ‘fresh-fast’ operator still needing a few more months to recover.
In our view, $400 is too close to the current price action, even if it’s simply a first spot to begin averaging in on shares. Technically, I’m more interested in buying CMG if shares were to test an area of support near $380 – $385 as denoted on our chart by the “X” in yellow highlight.
At roughly 5% -6% below CMG’s current price, this is inherently more approachable if we’re interested in nibbling at shares on weakness with ‘the turnaround’ not yet there on the calendar.
Lastly and regarding the “Guac-a-Mole” and other annotations on the CMG chart — that pre-earnings analysis from two weeks ago, appears to have needed one more price whack! from the bears. Doink!!
Chipotle Stock Bullish Strategy
Despite not getting the CMG stock chart entirely right, as I noted on twitter this past Friday, a discussed modified butterfly position did offer sizable triple-digit profits out of the gate. For those who may have held until the bitter end, a small 0.75% loss still compared favorably to the loss in Chipotle shares.
In the here and now, with our focus on buying CMG stock on a 5% – 6% pullback, I like the idea of ordering some strategic income, or what could amount to a very-well-done piece of CMG stock. This can be accomplished by selling the March $385 / $380 bull put spread.
For a credit of $1.20 or better, the trader’s risk is contained to $3.80 or less than 1% Chipotle stock risk regardless of how low CMG stock potentially trades during the life of the spread. And if the stock remains stationed above $385 at expiration, income from the initial credit is received in full.
If conditions worsen to the point where CMG stock is well below the spread, but the trader is still willing to bargain hunt and wants to begin accumulating stock, the spread allows for a controlled and effective way to do that as well.
For instance, if Chipotle stock is trading at $360 in the coming weeks, the trader simply closes the spread for a worse-case-scenario loss of $3.80 and simultaneously buys shares. Net, net the trader is beginning his or her campaign of buying CMG stock for $363.80. At the same time, shares have declined a full 10% from Friday’s $404. Now that’s some nice food for thought.
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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.
