Chipotle Mexican Grill, Inc. (NYSE:CMG) reported first-quarter earnings of $1.60 per share, notably higher than analysts’ expectations for $1.27. Revenues beat expectations, too, growing 28.1% year-over-year to $1.07 billion. Comp-store sales were up 17.8%. These results helped fuel the 2017 rally, but Chipotle shares only saw an ephemeral push above $500 in the after-hours session.
Those gains evaporated after management disclosed a payment systems breach on its conference call. While the investigation remains ongoing, investors don’t appreciate the uncertainty. This a very unfortunate development in what was an otherwise seemingly great report.
You see, Chipotle has rewarded investors in 2017, with CMG stock up 25%. For long-term investors, seeing CMG stock fall more than 50% for a brand that will likely recover was a no-brainer. Picking your spot on where to buy is the tough part. I had accumulated shares of Chipotle beginning at $440 and added several times close to $400.
I sold that position a few days ago at $480, however. It’s not because I don’t believe in the recovery process for CMG. Heck, the recovery is just getting started! Same-store sales are finally lapping its weak year and revenues are rebounding. Profitability hasn’t returned to pre-outbreak levels, but it’s on track.
My reasoning for selling was simple: risk/reward. After rallying from $395 on March 20 to $480 on April 20, I couldn’t justify owning Chipotle stock heading into a quarter with too many unknowns.
Is the sales recovery on track? Will management’s previous iteration for $10 in full-year per-share earnings be obtainable? It’s hard to tell.
How to Trade CMG Stock
Shares of CMG are up almost $100 per share over the past month. That’s a big rally, but the gains were set to continue until management brought up this payments system issue.
For short-term traders, volatility is surely to be in CMG stock given this news. The stock’s 18% short-interest will add to the volatility. Some shorts will double down while others will cover. Some buyers will add to their positions while others will book gains.
The bottom line? It will be choppy for a few sessions. Prior resistance had been near $480. With the stock currently trading near that level, it could have trouble getting above it. Should CMG clear $480, it would be bullish to see the stock hold this level as support.
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Should support hold, a run to $500 could be in the cards. If that’s the case, the 2016 high near $540 could also be on the table for CMG stock. Admittedly, though, this seems tough without clarity on the payments system breach.
Long-term investors still have little reason to bail on the stock now if they’re betting on a full recovery. Chipotle still has a powerful brand in the U.S. and its recovery is in its infancy. The business should gain momentum throughout 2017, which should only help the stock price.
The only caveat here is the payments system concern. If this is a minor setback or issue, it should only embolden the bulls. A big setback would be bad for CMG stock, however, although that should have little impact on the longer-term thesis.
Bret Kenwell is the manager and author of Future Blue Chips. He can be contacted on Twitter via @BretKenwell. As of this writing, Bret Kenwell held no positions in any security mentioned.
