Chipotle Mexican Grill, Inc. Stock Is Ripe With Opportunity on This Dip

CMG stock is under fire, but that's an opportunity to profit from it

By Nicolas Chahine, InvestorPlace Contributor

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Chipotle (CMG)

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Chipotle Mexican Grill, Inc. (NYSE:CMG) has yet to recover from its headline difficulties. Just yesterday, a new health-related headline broke out and CMG stock fell 4% in minutes. This once Wall Street darling is now a broken thesis of what was a hip restaurant with superior food.

There was a time when Chipotle stock delivered impressive comparable sales percentages and investors flocked to it like bees on honey. But a few years ago, people got seriously sick from their food and not just once. The problem persisted and sporadically resurfaced, so CMG stock fell off the $750-per-share levels to a recent low of $270. Management could have managed the outbreaks better and traders spoke with their bids or lack-there-of.

All along the way, Chipotle stock still had its fans, but I knew it would never recover its shining star status. Yet, I continued trading it from the bullish side on every dip same as I am doing today. I want to profit from what others fear and sell downside risk into support. This way I can generate income through options.

How to Trade CMG Stock

I am not buying CMG stock outright, as I don’t believe in it enough to risk $300-per-share without any room for error. My set up will not even need a rally to profit. all I need is for the price to stay above my risk and I retain maximum gains.

Otherwise, I could end up owning Chipotle stock at a discount.

Fundamentally, the CMG stock’s price-to-earnings is much more reasonable now, but it’s definitely not cheap. It’s still near 60, which is high in relative and absolute terms.

Compare this to say Apple Inc. (NASDAQ:AAPL), which is under 20, or even compare it to other restaurants like Habit Restaurants Inc (NASDAQ:HABT) and its P/E is still 40% higher.

Analysts are mostly in a holding pattern on Chipotle stock, which is understandable. On this dip, there could be a few downgrades, but I bet they continue to wait and see as price hovers below their average price targets. What I would expect is a reset of the upside price expectations. So there is risk going long now, but that’s why there is a reward and that is also why I leave much room for error.

The Bet: Sell the CMG Jan $260 put for $2.10. This is a bullish trade that has an 85% theoretical chance of success. However, I would accrue losses below $257.90.

Selling naked puts carries big risk, especially for a stock as frothy and violent as CMG. For those who want to mitigate it, they can sell a spread instead.

The Alternate Bet: Sell the CMG Jan $265/$260 credit put spread, where I have about the same odds of winning but with much smaller risk. However, the spread would yield 25% if successful.

Ultimately, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.

Get my newsletter for free here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.


Article printed from InvestorPlace Media, https://investorplace.com/2017/12/chipotle-mexican-grill-inc-cmg-stock-ripe-opportunity/.

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