Despite two robust sessions firmly ending a six-day losing streak in the Dow Jones, it’s been an ugly week for the markets.
Although the index gained over 6% since Aug. 24 — dubbed “Black Monday” by some — the Dow Jones is still behind about 900 points from before last week’s market correction began.
Most sectors that absorbed heavy losses, such as commodities or technology stocks, were telegraphed early on due to the massive collapse in Chinese equity markets, as well as broader weakness in the emerging markets.
A few have, however, bucked the overall bearish trend with a combination of strong fundamentals and favorable industry dynamics, specifically the trendy fast-casual restaurateur Chipotle (CMG).
Regardless of what’s happening across the global markets, CMG investors only hear noise. The strength of Chipotle’s balance sheet demonstrates why.
CMG Stock: Plenty of Cash to Grow
CMG is incredibly cash-rich, holding nearly $600 million worth of greenbacks based on its second-quarter earnings report. Even more impressive is CMG’s absence of long-term debt and the fact that total assets outpace total liabilities by over five times.
Chipotle stock also benefits from being in an industry long considered recession-proof, or at the very least, recession-resistant. The on-the-go lifestyle of millions of Americans, combined with the obvious need for sustenance (nutritional or not), tends to make fast-casual eateries a cost-effective alternative to casual restaurants.
The numbers speak for themselves, continuing to draw a multitude of investors to Chipotle stock. Total revenue for FY2014 increased by an average of 38% against the prior two years’ results. The quarter-over-quarter revenue trend is likewise positive, and suggests that CMG could have another strong year of top-line sales.
Chipotle’s management team has also done an excellent job in preventing costs of goods sold and operational expenses from outpacing gross profit growth — a not so easy task given the general rise in food prices.
Where it really counts for investors of course is Chipotle stock’s performance in the markets, which has been remarkable given the extreme bearishness witnessed over the past week.
CMG stock wasn’t completely unaffected — it dropped about 7% of value between Aug. 18 and Aug. 25, but it did manage to win back most of those losses. Currently, Chipotle stock is sitting inside 5% of its all-time high and is up about 6% year-to-date.
The biggest question mark for CMG is whether it can keep up its impressive pace. Since 2010, when Chipotle’s average annual price leapt over 100% against the prior year, the rate of valuation growth has steadily declined. Though CMG is still one of the stronger names in the markets, there is a risk of industry saturation, and thus, diminishing returns for investors.
There are still concerns, which Wall Street has yet to address, about the health of the U.S. economy that may add more pressure to the markets in coming months. However, if one was still determined to buy something for the long-term, stable names like Chipotle may be an ideal opportunity.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
