It might be over for Chipotle, but there’s still money to be made for astute traders.
If you trade earnings, this one is a slam-dunk…
Shares of Chipotle Mexican Grill (CMG) rallied recently, after a glossy company presentation had investors enthused about the recovery of the beaten down fast-casual restaurant.
Not so fast.
The darling of the momentum crowd hit a massive speed bump when E. coli and norovirus outbreaks hit the company hard.
Suddenly, the focus on fresh had serious consequences. Shares plunged, and for good reason.
Human behavior is a funny thing. Even the possibility of sickness in the back of a diner’s mind will cause hesitation. If there is enough pause, a massive shift in behavior can and will occur, which is exactly what we’re seeing today.
Let’s take a look at Chipotle’s rise and fall—and how you can still profit from it all…
Chipotle’s Rise and Fall
Chipotle’s simple, fresh, fast and filling fare had consumers in a tizzy. Mass expansion followed.
The jam-packed restaurants with lines snaking out the doors had the impact akin to the run on the bank.
Long lines must mean the food is good, thereby attracting more customers. Once addicted, they came back again and again.
Shares of Chipotle sold faster than a burrito bowl on Wall Street. With so much demand and so few shares available, Chipotle’s valuation skyrocketed.
The story was compelling enough to deserve a premium price—until the company served up death, or at least the possibility of it…
After the notorious outbreak of cases of norovirus and E.coli at Chipotle locations around the country, those lines snaking out of the restaurants disappeared and the run on the bank evaporated into thin air.
Now let’s look at how noodles fit into the equation here.
The Noodle Comparison
To get an idea of where Chipotle is headed, take a look at fellow fast-casual dining operation Noodles & Company (NDLS)…
On the surface, there isn’t much difference between Chipotle and Noodles.
So why does one have an over $13 billion valuation, while the other struggled mightily for its $300+ million valuation?
While there are obvious explanations for the disparity, the gap in value should cause investors to pause when considering buying Chipotle shares.
Forget the nominal differences for a moment and focus only on the 65% drop in Noodles’ share price in 2015.
That decline came about as a direct result of there being no lines out the door, yet that is exactly Chipotle’s reality today.
And since it’s today that matters, Chipotle shares may be in a world of hurt…
How to Play the Chipotle Plummet
No managerial sugar-coating about the lines magically reappearing when the scare ends will make it happen for Chipotle…
What makes CMG a fun stock to analyze is the ability to simply walk down the street and see for yourself what’s happening on the front lines.
From what many can see, those lines are gone—and perhaps for good.
Chipotle shares could decline by up to 50% in the coming year as a result, with the next leg down after the company reports earnings results for the fourth quarter of 2015.
Those numbers are expected to arrive on Tuesday, February 2 after the market close.
For anyone inclined to trade earnings, this one is a slam-dunk with 99% certainty of disaster.
Think about buying some Chipotle put options in advance to profit from the coming collapse.
This post originally appeared in mainstreetinvestor.com.
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