Chipotle Mexican Grill, Inc. (NYSE:CMG) served as the laughing stock of the publicly-traded restaurant group for several years. However, Chipotle stock has been on an absolute tear so far in 2018 — and that’s putting it mildly.
Shares are up a whopping 62% so far this year and don’t show many signs of stopping. In February it was announced that Chipotle would bring in Brian Niccol to run the company. Niccol previously served as the CEO of Taco Bell, a division of Yum! Brands, Inc. (NYSE:YUM). Before that he had served in various roles for both Taco Bell and Yum, primarily in the marketing and operations departments.
Investors cheered the move (as they should have), given Niccol’s potential to alter Chipotle’s distasteful public image. While I like Chipotle’s long-term potential, even I will acknowledge that its recent run might be too much too soon. Still, that’s not stopping investors from piling in.
Valuing Chipotle Stock
So if the move is too much too soon, where should Chipotle trade? Unfortunately there is no one-size-fits-all here. Perhaps CMG is a bit ahead of its skis based on what it will earn this quarter or what its comp-store sales are at the moment. But investors are piling in for the future. They want to own a chunk of Chipotle stock, as the burrito giant continues to build momentum.
Some may not care if there’s a lumpy quarter here and there or if Chipotle stock consolidates between $450 and $500 for the next 12 months. These long-term investors are looking for the move back into the $600s down the road.
Besides, where else are they going to invest?
Domino’s Pizza, Inc. (NYSE:DPZ) and Wendys Co (NASDAQ:WEN) are still on fire. But McDonald’s Corporation (NYSE:MCD) seems stuck in the mud. So does Yum and Restaurant Brands International Inc (NYSE:QSR). Starbucks Corporation (NASDAQ:SBUX) has been downright awful.
Is Chipotle expensive at 54 times this year’s earnings and 40 times next year’s expectations? Yeah, it is. But the situation is improving, margins are expanding and sales are rebounding — forecast to grow roughly 8% this year and next. That’s got investors excited about what’s to come and what Niccol can do when he has the wind at his back rather than in his face.
Am I advocating that one buy Chipotle stock right here, right now, on the promise of more upside? No. I’m just saying I can see why investors have been buying and I can see why they’re staying long rather than taking profits.
Trading Chipotle Stock
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Given that layout, let’s look at the stock price. At $470, Chipotle stock is just $30 away from being a double off its February lows. That’s just another 6.4% from here! If it gets there, it will cap an impressive rally and put a big smile on Niccol’s face.
Can it do it? Perhaps. All through this $475 to $500 level there is stiff resistance. While it’s not impossible for Chipotle stock to grind higher, burst through resistance and move even higher, the odds don’t favor it.
That doesn’t mean Chipotle stock needs to fall from $475 to $400. It could simply trade in a tight range until bulls are ready to push it higher once again. That would be the healthy option and it’s what happened after the last big earnings-inspired rally.
Worth mentioning is that Chipotle has a 13.5% short interest, meaning further upside could trigger a short squeeze. That’s one way it could get through resistance, as a lot of shorts are probably using an obvious stop-loss level, like $500.
That said, investors with new money should wait in my view. If Chipotle stock dips down to the $420 to $435 range, its last consolidation area, investors who want a position should pounce on the opportunity.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell sadly held a long position in SBUX.
