Chipotle Mexican Grill, Inc. (CMG) Stock Still Faces Too Many Headwinds

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CMG stock - Chipotle Mexican Grill, Inc. (CMG) Stock Still Faces Too Many Headwinds

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Although the impact of the 2015 Chipotle Mexican Grill, Inc. (NYSE:CMG) food poisoning outbreak seems to be fading, it still appears to be affecting the company’s sales and will probably continue to do so for some time. Meanwhile, Chipotle is facing rising competition as more fast food chains make their menus healthier. Finally, the valuation of CMG stock is still very high. In light of all of these factors, investors should sell Chipotle stock as soon as they can.

Chipotle Mexican Grill, Inc. (CMG) Stock Still Faces Too Many Headwinds

Source: Shutterstock

Chipotle’s same-store sales jumped 24.6% in January 2017, versus January 2016. However, the company was facing an easy comparison, as it was in the midst of its food poisoning outbreak in January 2016.

Compared with January 2015, Chipotle’s same-store sales in January 2017 dropped more than 10%. Moreover, based on the fast food chain’s full-year comp sales guidance, it expects its 2017 same store sales to be 10% to 13% below 2015 levels. Clearly, CMG stock is still a pretty long way from reaching the same-store sales levels of its glory days.

Using common sense, it’s easy to see why some of Chipotle’s old customers aren’t going to come back anytime soon. The company’s brand and comparative advantage were (and are) largely rooted in the idea that it serves healthy food.

The Other Issues for Chipotle Stock

After its food got many of its customers sick, the notion that its food is healthy has undoubtedly been undermined in the minds of many Americans. It probably doesn’t help matters that some experts have said that CMG’s decision to obtain its food from small farms make its products less safe than food sourced from larger farms.

Also not helping Chipotle stock is the fact that other fast food chains have begun offering more natural, healthier food in recent years. For example, Panera Bread Co (NASDAQ:PNRAhas proclaimed that it is using “100% clean” ingredients, and McDonald’s Corporation (NYSE:MCDlast year committed to serving only chicken that was raised without “antibiotics that are important to human medicine.” The fast food giant is also only using fresh beef for its quarter-pounders, and it has enhanced the healthiness of its food in other ways. Meanwhile, Wendys Co (NASDAQ:WEN) is offering “all-natural lemonade” and “natural-cut fries.”

Despite all of the major headwinds outlined above, Chipotle’s valuation, as measured by its forward price-to-earnings ratio, is still heads and shoulders above most if not all of its peers. Chipotle stock has a forward P/E of nearly 39 . By contrast, Wendy’s has a a forward P/E of 24.5, Burger King owner Restaurant Brands International Inc (NYSE:QSR) has a forward P/E of about 23.5,  McDonald’s has a forward P/E of around 19.8, and Yum! Brands, Inc. (NYSE:YUM) has a forward P/E of about 20.5.

Another discouraging sign for investors is that Bill Ackman’s Pershing Square, a very well-known hedge fund, last month “filed papers that would allow for the sale [of] 2,882,463 shares” of CMG stock. This apparently represents all of its investment in Chipotle stock.

The filing came after Pershing bought more than 2.3 million shares of CMG stock in the fourth quarter of 2016, bringing its total stake in the company to 9.96%. It seems doubtful that Ackman would consider selling his entire investment in Chipotle stock so soon after acquiring most of it unless he had seen or heard something quite negative about its outlook.

Bottom Line on CMG Stock

Chipotle doesn’t expect its 2017 problems to come close to the levels they had reached before its food poisoning outbreak, and it’s doubtful whether the company will be able to reach those levels anytime in the foreseeable future. Meanwhile, other fast food giants are offering more natural choices, further reducing CMG’s advantage in that area. And despite all of these headwinds, the valuation of CMG stock is pretty stratospheric.

Investors should follow in the (apparent) footsteps of Bill Ackman and look for an opportunity to sell Chipotle stock at the earliest opportunity.

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

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/chipotle-mexican-grill-inc-cmg-stock-many-headwinds/.

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