In the past few months, there’s been no shortage of information available about my pick for 2016, Chipotle Mexican Grill, Inc. (CMG). Chipotle is a fast-casual restaurant chain that specializes in fresh Mexican food and has gained recognition for its commitment to serving food with integrity.
However, this promise was called into question over the winter as food-borne illnesses were linked to the restaurant. For a couple of months, it seemed like Chipotle couldn’t catch a break, as cases of E. coli and norovirus were linked back to the chain. This has had a clear impact on the company’s sales in 2016 so far, as Chipotle reported that February sales slipped 26.1% and that it now expects a $1 per share earnings loss in the first-quarter.
But this isn’t a company that will stay down for long. And as we prepare to close the first quarter of 2016, I continue to be a big fan of CMG.
Why I’m Bullish on Chipotle
First, as I predicted in my original article, the Chipotle-related illnesses were relatively short lived. The recent store closing in Massachusetts didn’t help CMG’s share price recently, but the restaurant’s reaction to the potential threat of illnesses showed that it is taking its new safety measures seriously. Also, since there were no customers that were impacted by the norovirus-infected employee, I suspect the damage will be minimal.
Second, Chipotle has a loyal customer base. Now, I know that a fair share of this group took a break from their favorite burrito bowls when the E. coli scares began, and I wouldn’t expect anything less. However, it seems that consumer caution hit its bottom in January, and Chipotle fans are slowly making their way back to the chain. The restaurant is also giving these consumers some incentive to reestablish their old habits. In the second half of February, Chipotle mailed out coupons for free burritos and free chips and salsa. This has boosted sales for the restaurant, and if these customers return to Chipotle after they use their coupons—which I think they will—the fast casual chain will be well on its way to making a comeback.
Third, Chipotle is by no means the first restaurant to have a food crisis. Well-known chains, such as Jack in the Box (JACK), Taco Bell and McDonald’s (MCD), have all been through similar situations and have made full recoveries. The rebound wasn’t immediate for any of them, but generally, within a year, they were back to pre-crisis revenue figures.
Fourth, Chipotle is very optimistic about its own future. In December, the restaurant repurchased 401,137 shares of its own stock (which is well above its usual buyback numbers), and its board of directors recently raised the company’s buyback authorization. This shows me that the company is very confident that its stock price will return to its previous levels. It’s now using the recent declines to its advantage, as it’s able to buy shares at much lower levels.
My Overall Outlook
Chipotle also continues to post very good technical indicators (85 out of 100 in the Turner Analytics database), so it would not surprise me to see CMG back up to its lifetime high of $750 within the next year. And if average daily volume is any indication, the market agrees with me. Though down modestly since the beginning of the year, Chipotle shares have been incredibly resilient on the whole, and the average daily volume has nearly doubled.
With all of this in mind, I’m sticking with CMG and its amazingly good food.
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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