Is Chipotle Mexican Grill, Inc. (CMG) Stock Next on Ackman’s Hit List?

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The biggest news story Monday was easily Bill Ackman’s announcement that Pershing Square Capital Management, Ackman’s multibillion-dollar hedge fund, had sold its entire Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stake at a $3 billion loss. Immediately, my mind started to think about Ackman’s other tenuous positions, Chipotle Mexican Grill, Inc. (NYSE:CMG) being at the top of the list.

Is Chipotle Mexican Grill, Inc. (CMG) Next on Ackman’s Hit List?

What if Ackman’s tired of beating dead horses and VRX is only the first in a bunch of moves meant to reduce risk in the Pershing Square portfolio? A culling of the herd, if you will.

Before the markets opened Tuesday, investors were freaking out about what this means for Valeant’s future; not surprisingly, VRX stock is down about 11% through midday trading.

Is CMG next on Ackman’s hit list? Should it be?

The Case for CMG Stock

Well, if you go by CMG’s action today, it doesn’t seem like investors consider the two stocks to be in the same league; Chipotle stock is down 1% in average trading.

In addition, consider that VRX represented between 1.5% and 3% of the total Pershing Square funds under Ackman’s control (approximately $7.2 billion at the high end of 3%), which means we’re talking about a $3 billion tax loss that can be applied against future gains. It might be massive to the average investor, but it will probably serve more as an expensive reminder than anything else.

He basically said as much in Pershing’s announcement.

“We elected to sell our investment and realize a large tax loss which will enable us to dedicate more time to our other portfolio companies and new investment opportunities,” Ackman admitted.

Look, if you’re going to play on a big stage, sometimes you’re bound to have colossal failures. This is only going to make him work that much harder to ensure the same thing doesn’t happen again.

What is it they say, “Fool me once, shame on you. Fool me twice… shame on me.”

These are the life lessons that make us stronger, and investors of all capabilities should be taking this very seriously, because it could happen to you. If you’re in the investing game long enough, it most certainly will. When it does, cut your losses while they’re manageable.

What Does This Mean for Chipotle Stock?

Well, for one, Ackman’s now got more time to spend on the company’s revival, and while it’s often difficult to fix restaurant concepts once they’ve lost their edge, I imagine it’s a lot easier than turning around a drug company with $29 billion in debt.

You save those that can be saved.

That said, Pershing Square filed a shelf registration prospectus with the SEC on March 3 that gives Ackman an opportunity to sell his 2.9 million shares at some point in the future. While Ackman has no plans to sell at the moment, this shelf registration makes it that much easier should he change his mind.

If you’re CMG CEO Steve Ells or the board, you want to make it easy for Ackman to leave but as Jonathan Maze of the Nation’s Restaurant News recently wrote, Ackman hasn’t made any money on his CMG stock since buying in September, so it makes little sense to leave. In addition, he has only had his four board seats since mid-December, hardly enough time to affect change.

Should the stock be less than $416 come the end of the summer, I’d expect either a hasty retreat by Ackman or some real fireworks between himself and Ells.

Barron’s recently published Buckingham Research Group analyst John Zolidis’s thoughts on Chipotle’s recovery. I’ve only included the parts I found relevant.

“Same-store sales in January gained 24.6% despite very limited promotional activity vs. (36.4%) LY. Looking forward, we believe that the sales recovery will accelerate as management aligns store teams against revised customer-oriented goals and as digital and marketing efforts are brought to bear,” wrote Zolidis. “The company’s 20% restaurant-level margin and $10 EPS goals still look somewhat out of reach but we believe the main factor for both margins, earnings and the stock will be the pace of same-store sales.”

Chipotle is on the road to recovery, albeit much slower than investors would like, but the signs are there that it’s actually happening.

The only way Ackman sells at this point is if he’s getting out of the investing game. Otherwise, I don’t see CMG stock being on his hit list.

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

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/chipotle-mexican-grill-inc-cmg-stock-ackman/.

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