I must admit that I haven’t paid much attention to Chipotle (NYSE:CMG) over the past several months. After receiving a nice pop following its outstanding first-quarter earnings report, Chipotle stock mostly entered a frustrating consolidation pattern.
My initial thoughts were, here we go again! It’s the same, old CMG stock, with perhaps some different seasoning sprinkled on to confuse passersby. One of the biggest reasons why I was hesitant on the trendy eatery was history.
Back in the early 1990s, Jack in the Box (NASDAQ:JACK) suffered a horrific bout of food contamination. In the end, over 700 people across four states fell ill, leading to 171 hospitalizations and four deaths. It took many years, and an entirely revamped marketing campaign before customers trusted JACK.
I wasn’t alone in wondering whether Chipotle stock would suffer the same fate. Some of the similarities between CMG’s food-poisoning outbreak and JACK’s crisis are eerie, including the number of people affected.
However, Chipotle exceeded nearly everyone’s expectations. With its back against the wall, CMG stock kept fighting. Today, it’s one of the strongest names on Wall Street, having gained nearly 65% year-to-date.
If you speculated on the long side, congratulations! Now is a great time to sell Chipotle stock into strength.
Chipotle Is Overheated
The most obvious clue that CMG stock may face downside pressure soon is its technical chart. While technical analysis isn’t exactly a uniform science, you can glean useful information from generally-accepted principles.
For instance, both the relative strength indicator (RSI) and the moving average convergence divergence (MACD) are flashing red-hot. Another confirming factor is volume. As the price for Chipotle stock rises, volume isn’t following it up into the stratosphere.
That tells me that most investors are in “wait and see” mode. If so, I wouldn’t jump onboard here. Under such circumstances, the markets want to see some justification for the elevated prices. If they don’t receive at least a compelling narrative, they’ll likely dump CMG and search for better opportunities.
Beat them at their game, and capture a premium rate for your earlier speculation.
CMG Stock Is Overvalued
I’ve read recent analyses on Chipotle stock that suggested the low-hanging fruit in this equity is gone. I couldn’t have said it any better myself.
What I will do, though, is quantity my argument.
Click to EnlargeA major contributor to Chipotle’s comeback story was revenue growth. Management threw everything at their rehabilitation efforts, including generous discounts and freebies. While this tactic challenged margins, it revitalized growth. In 2017, quarterly revenues grew an average 15% on a year-over-year basis.
With such a robust rate, CMG stock naturally found its way back to the top. But now, I think that narrative is overcooked. For example, consider quarterly revenue growth in 2018, which has dropped down to under 9%. Contrast that to the share price, which increased over 47% last year.
This year, Chipotle is up 65%, as I mentioned earlier. The burrito specialist may have produced solid numbers for its first quarter. That said, I don’t think they did enough to justify that 65% premium. Again, if I’m profitable on CMG, I’d take it while the going is good.
Chipotle Stock and Demographic Challenges
With millennials representing the largest workforce right now in America, marketers are constantly seeking ways to attract them. This is a tricky endeavor under the best of circumstances. However, one thing everyone can agree on is that millennials love eating out.
Another distinctive millennial trait is their thirst for authenticity. This is a generation that genuinely believes that through their choices, they can make a positive impact on the world. That being the case, attributes such as small and local are in, and big and branded are out.
And how authentic is Chipotle? Probably about as authentic as a Philadelphia sushi roll, which is to say, not very.
That’s the problem Chipotle stock will face in the future. Over the years, millennials have earned a reputation for their pickiness and fickleness. If seasoned players like McDonald’s (NYSE:MCD) are constantly tweaking their menus, so must Chipotle.
But I’m not seeing any substantive changes. Every time I go to one of their stores, I can expect the same thing: an unimaginative burrito wrapped in aluminum foil. At a time when everyone is mixing it up, staying static is risky.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.