Warren Buffett once said, “Be greedy when others are fearful.”
The rebound in Chipotle (CMG) stock over the past two months is Exhibit A as to why.
In December, Chipotle was making people sick. Literally. Customers in 11 states were poisoned with either E. coli or norovirus after eating at a Chipotle from October through December.
The company estimates that the multiple outbreaks cost the company between $6 million and $8 million. It also sent Chipotle stock into a three-month tailspin.
From Oct. 13 to Jan. 12, CMG plummeted from $750 a share to $404 a share — a 46% haircut. Doomsayers declared the company — and CMG stock — dead. Chipotle would never win back customers’ trust, they reasoned.
The claims weren’t unreasonable. After all, if you’re a fast-food chain that prides itself on being a fresher, healthier alternative to McDonald’s (MCD) and Wendy’s (WEN), and that food makes hundreds of people around the country violently ill … well, that’s more than just a minor embarrassment.
Chipotle Stock Getting Well
I live near a Chipotle, and up until a few months ago I ate there all the time. Then the E. coli and norovirus breakouts happened, and I didn’t return to Chipotle for months. But time cures many ills — even E. coli — and last week I made my triumphant return, and it was delicious!
My thinking? The restaurant has been so scolded and shamed for what it did that its food has probably never been fresher or more thoroughly cooked and washed.
And that’s probably the same mentality investors have had in deciding to buy CMG stock in droves over the past two months. Things couldn’t possibly get any worse, bargain hunters probably rationalized. The company’s business model and national footprint hadn’t changed, and that made CMG a very attractive long-term buy after losing nearly half its value.
Since that Jan. 12 bottom, Chipotle stock is up more than $100 (or 26%), opening Wednesday trading at $514. Not surprisingly, the company had a rough fourth quarter, with sales falling 6.8% and earnings, down 44%, declining for the first time in years. Sales are expected to be flat this year, while per-share earnings could take a nosedive from last year’s record-high of $15.10.
The good news is that both numbers are expected to grow substantially again in 2017. Once the bad publicity blows over and the E. coli and norovirus fears are pushed into the deep recesses of consumer consciousness, everyone will forget why they were afraid to order those barbacoa-and-black bean burritos they once regularly devoured without hesitation.
Looking at the company from a 10,000-foot view, CMG is still perhaps the greatest growth story going in the fast-food industry, with sales up fivefold and earnings tenfold over the past decade. McDonald’s, whose sales haven’t even doubled in the past 10 years, would kill for that kind of growth! As would Wendy’s, Yum Brands’ (YUM) and Jack In the Box’s (JACK), for that matter. Even Starbux (SBUX) can’t come close to matching Chipotle’s growth.
Bottom Line on CMG
Fast casual is still at a premium in today’s go-go society. And though the last few months have been, in founder Steve Elis’ words, “the most challenging period in Chiptole’s history,” by now the Chipotle brand is fully ingrained in America’s subconscious.
I’m sure there are plenty of people like me who decided to take a hiatus from the restaurant for a few months at the mere mention of the word “E. coli.” Also, like me, most of those customers will return. Five years from now, people will scarcely remember it.
So, while the reverberations — and, for some, lingering stomach rumblings — are still being felt from Chipotle’s colossal, 11-state disaster, the company isn’t dead. Slowly but surely, customers will return, and Chiptole’s industry-leading growth will resume.
Meanwhile, despite the recent rebound Chiptole stock still trades 32% below its August 2015 peak. Fear drove CMG down to such levels, and a lot of it still exists. And that’s why, as Buffett would say, you should be greedy before all the E. coli and norovirus fear subsides.
When that happens, it’ll be too late to buy CMG.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.