Shares of Chipotle Mexican Grill (NYSE:CMG) have been surging this year, fueled by new leadership and improving fundamentals. As a result of its monstrous performance, some investors are wondering if they can keep hanging out in CMG stock as a safe-haven stock amid the correction.
CMG stock reminds me of Starbucks (NASDAQ:SBUX). Both are off their highs, yet still up impressively from recent lows, continuing to reward investors who’ve stuck by over the last few months. In fact, Starbucks is one of the best-performing stocks in the S&P 500 index this quarter, up just over 15% against the S&P’s 14% decline since Oct. 1. A rebound in CMG stock — down about 2% in the same period — would also keep shares going strong.
It boils down to a simple question: Can the outperformances continue or will the market eventually punish these stocks too?
After being rejected from the $500 level twice in November, CMG shares are quickly down more than $50 apiece. Let’s explore this name to see whether it’s a buy on the dip or one to avoid right now.
Trading Chipotle Stock
Click to Enlarge
The otherwise busy chart above shows several important levels. From this picture, I would like one quick flush to the 200-day moving average, putting Chipotle stock near $435 per share. We can risk about 5% on the position, allowing CMG to slip down just under $420 before stopping out.
The black line on the chart above shows this level has been significant since May. Should it fail, we’d want to bail. So long as CMG stock stays above this level, we can see a rebound into the $460s. From there, it puts a retest of the $500 level in the cards.
From a trading perspective, Chipotle stock is one of the very few names in the S&P 500 that’s still trending higher or sideways. Most names in the index have busted charts loaded with vulnerability. CMG is not immune to a breakdown and all it takes is one bad bit of news to spark a precipitous decline.
A bad earnings result, guidance, or yet-another illness outbreak could be the cause. But until something knocks CMG off track, the stock continues to trade very encouragingly. This limited-risk trade is attractive for those looking for a shot on the long side without betting the farm.
Bottom Line on CMG Stock
Bargain-hunting investors won’t find what they’re looking for with Chipotle stock. In fact, with no dividend and a high valuation, it’s far from the prototypical safe-haven asset. More often in times like these, companies with the strongest balance sheets or the most-dependable dividends do the best.
CMG shares trade at roughly 50 times this year’s earnings. However, the stock trades at a much more reasonable 37 times next year’s earnings. True, this is not cheap, but with a return to momentum, Chipotle is looking attractive.
That’s as the momentum is not limited to just one catalyst. The stock price — as we laid out above — has bullish momentum. Earnings have momentum, as analysts expect 29% growth this year before accelerating to 40% growth in 2019. Revenue growth is maintaining momentum, with expectations to expand ~8% this year and next year.
Most companies have earnings growth decelerating in 2019 thanks to the one-time tax bump many received this year. However, with CMG boosting its growth, it will surely find itself on many investors’ radar next year. That is, assuming it can deliver on expectations.
It’s not cheap, but I would bet on Chipotle stock rather than against it provided it continues to maintains momentum and holds up over support.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long SBUX.
