The Next 5 Chipotle Earnings Disasters

by Traders Reserve | July 25, 2012 8:05 am

Play with fire and you will likely get burned.

No need to remind that to those lovers of Chipotle Mexican Grill (NYSE: CMG[1]). Investors in that former high flying company awoke to a rude awakening last week in the form of an earnings disaster[2] that resulted in shares losing more than 20% in the day of trading after the news was released.

I play the earnings game from a trading perspective and what I saw with Chipotle was entirely predictable and therefore potentially lucrative. Specifically, I wrote in my Earnings Player Tip Sheet[3] (a weekly review of stocks reporting earnings that week) that the mustard might be off the Chipotle burrito.

Boy was I right on that one!

Now I want to put my attention front and center on stocks like Chipotle with nose bleed type valuations that might be poised for a fall. Trends do indeed pay off.

This week there are five companies reporting results that I expect to be trigger epic collapse. The play on each of these is to bet against the company in the form of a put option. Buy your contracts immediately before the close of trading and close the position the very next day.

That’s how Earnings Players make the big bucks and you can too.

Here are the 5 Chipotle earnings disasters in the making that you can trade this week:

1) Buffalo Wild Wings

Walk in a Buffalo Wild Wings (NASDAQ:BWLD[4]) and you can’t help but be impressed. The bar and restaurants seem to be always packed with happy customers feasting on wings and beers. The growth story has surely been impressive and investors have been rewarded with a stock trading for a premium valuation.

Chipotle’s news sent shockwaves through the entire market, but that was especially true for Chipotle. Shares were down more than 5% on the same day Chipotle collapsed. Could a replay of the earnings disaster happen to BWLD?

I think so. We are hearing about corn prices increasing at the same time we are facing a global growth slowdown. Chickens eat corn and thus prices there are likely to negatively impact BWLD in the future. This stock could easily shed 20% after it reports earnings this week.

2) Dunkin Brands

Doughnut maker Dunkin Brands (NASDAQ:DNKN[5]) has enjoyed a renaissance since shares went public last year. Shares have moved steadily higher thanks to strong profit growth. With commodity prices eating in to already thin profit margins this stock is poised to fall after it releases its profit numbers this week.

Analysts expect profits to grow by 15% from the current year to the next, but shares are trading for 26 times current year estimated earnings. That’s a steep price for a doughnut.

If flour prices, a key ingredient for doughnuts, go up it is unlikely that Dunkin will hit the numbers. The key demographic for Dunkin does not typically take well to price increases. Nope, profits will not likely hit the numbers currently anticipated.

As such shares must adjust lower.

3) Domino’s Pizza

The irony of stocks like Chipotle, Buffalo Wild Wings, and Dunkin is that the products they sell are the very food groups consumers worried about weight gains need to avoid. The problem is that these food items tend to be very cheap and in this economy cheap is king!

Add Domino’s Pizza (NYSE:DPZ[6]) to the list of fast food chains offering cheap and fattening food. They are in the right place at the right time, but not if raw material costs are rising and demand is possibly slowing. Who doesn’t love the convenience of a pizza night, but is pizza something you can cut if it costs too much or if your monthly income decreases?

I think so and I expect Domino’s to say as much when it reports earnings this week. There is no way I would pay 17 times current year earnings for a stock that is expected to grow profits by 14.5%. A more reasonable price is something below 10 times current year estimated earnings.

4) Whole Foods Market

I’ve watched Whole Foods Market (NASDAQ:WFM[7]) with amazement as the company rapidly expands its business and grow its profit base. The question I have is how long can this last?

Seriously, making money in the grocery business is tough. It has been even tougher since the discount giants Target (NYSE:TGT[8]) and Wal-Mart (NYSE:WMT[9]) entered the space. Despite those realities, Whole Foods keeps on cranking and as it does the higher the stock goes.

The action in Whole Foods reminds me of the dot com bubble and we all know how that ended. Here is what we know today: analysts have profits improving by 14.5% in the next fiscal year ending September 30, 2013. Shares trade for 34 times current fiscal year estimated earnings.

This one could be the next Chipotle when it reports earnings this week. There is plenty of room for this stock to fall at any sign of reduction in guidance or weakness in results.

5) Starbucks

The king of coffee is back and investors have taken notice. Over the last 2 years shares of Starbucks (NASDAQ:SBUX[10]) have more than doubled in value. It is hard to argue against such performance, but what has really changed?

Where is the future growth going to come from? Is food really the answer? I’m not suggesting that the coffee business is a place to be, I just don’t think it merits a huge premium.

At the moment, analysts expect Starbucks to grow profits by a whopping 25%. I’m sorry I just don’t see that happening. The expectations are way too rosy given a softening economy and rising commodity prices.

I expect those future estimates to come crashing back to earth along with the stock when the company reports results this week.

  1. CMG:
  2. earnings disaster:
  3. Earnings Player Tip Sheet:
  4. BWLD:
  5. DNKN:
  6. DPZ:
  7. WFM:
  8. TGT:
  9. WMT:
  10. SBUX:

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