Best Stocks for 2016: Chipotle (CMG) Will Serve Up Big Gains

Chipotle's simple layout and trend consciousness will overshadow short-term E. coli fears

Editor’s note: This column is part of our Best Stocks for 2016 contest. Mike Turner’s pick for the contest is Chipotle Mexican Grill, Inc. (CMG).

As we look forward to 2016, consumer spending will continue to be one of the main drivers of the U.S. economy. Though the economic recovery has been slow, job growth and housing are starting to show signs of improvement. As a result, people are starting to feel more confident about using their disposable income.

10BEST2016_final_185x185In fact, the Commerce Department reported that retail sales increased 0.2% in November over the previous month. That included sales at retailers and restaurants. Consumers have been more cautious about big-ticket items like vehicles but appear to be a little more willing to open their wallets for essentials like food and clothing, as well as electronics, music, books and appliances.

So, as we head into the New Year, there is one area where I think consumers will continue to spend their money: Restaurants. That’s because even if consumers remain a bit uncertain about the state of the U.S. economy, having a meal at a restaurant is a more easily justified expense (everyone needs to eat!).

As a result, my number-one stock pick for 2016 is a widely popular restaurant that always seems to have a line out the front door: Chipotle Mexican Grill, Inc. (CMG).

In 1993, Chipotle was founded on the idea that a quick meal did not have to include the traditional fast food experience. Over the next five years, the chain expanded throughout Colorado, and from there, throughout the entire United States. Today, Chipotle is composed of fast casual restaurants that specialize in fresh Mexican food, including burritos, burrito bowls and tacos. It now has more than 1,500 locations throughout the United States, United Kingdom, Canada, Germany and France.

Now, some of you may be surprised that CMG stock is my pick for the upcoming year, due to the recent food-borne illness reports linked to the chain. It is true that Chipotle has suffered from reports of E. coli and norovirus in recent months, and the chain is expecting to see an 8% – 11% drop in same-store sales this quarter. However, along with temporarily closing all locations in question, its CEO has issued formal apologies to the general public, which has helped to keep loyal customers happy. I suspect that the illness reports are a short-term problem that will lead to a relatively short-lived downside risk.

In fact, going forward, I’m extremely bullish on CMG. The company has very strong fundamentals in the Turner Analytics database. Its year-over-year earnings growth, for example, received a 10 out of 10 rating, and its overall Demand Fundamentals overall received a 77 out of 100.

Chipotle’s Big 3

Here are a few more of the reasons why CMG tops my list:

First, the restaurant keeps it simple. Customers can choose from a number of items, but they’re all made up of the same base ingredients. This allows Chipotle to add more menu items, such as the salad that they rolled out in 2005, without increasing costs. This gives the company incredible growth potential and keeps the bottom line appealing for investors.

Second, Chipotle pays attention to consumer trends and adapts accordingly. In 2003, back when the low-carb diet was gaining popularity, Chipotle introduced the burrito bowl and attracted many customers with it. (They estimate that they sold seven million burrito bowls that year.) More recently, it began to focus on high-quality, high-integrity ingredients, which was a very popular move with consumers.

Third, share prices have climbed steadily higher over the years. In January of 2013, CMG stock sold for about $300 a share; by January of 2015, shares were trading in the $700 range. So if the company can get past the safety issues of its food sources—which I believe it will—this stock could certainly recover to its high of $750 in 2016, which is more than a 35% move from current levels.

For all of these reasons, CMG is my entry for the Best Stocks of 2016.

Mike Turner and his team of software engineers developed Turner Analytics, a sophisticated software market and trade-timing system that provides unbiased, quantifiable recommendations on thousands of equities and rates, ranks and scores these equities from best to worst in an easy-to-use on-line tool for individual investors. He is also the editor of Signal Investor, a service that provides a managed portfolio of stocks. His Perfect 10 Trader and Quick Hit Trader focus on shorter-term trades.

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