Chipotle (NYSE:CMG) has been monstrous lately. CMG is a restaurant company yet Chipotle stock trades like a technology momentum stock.
But this wasn’t always the case. In 2015, Chipotle stock was soaring to $750 per share, but then it hit a giant roadblock and then it collapsed 60% from high to low.
Last night, management delivered a strong earnings report that was reminiscent of the old days. CMG beat on all metrics and raised guidance. And the company delivered double-digit growth. Furthermore, it doubled its digital sales, which shows us that they seem to be making all the right moves.
On the way up, CMG stock commanded a premium because of the incredible comparable sales the company was able to deliver. So it earned it for as long as it delivered the growth.
When I’m evaluating a growth company I don’t worry so much about the profitability for as long as they are growing.
But then the food illness headlines broke out and the problems caused the comps to fade. The fall was severe as the headlines kept on coming. Wall Street took back the premium out of the stock.
2018 was a terrible year for the whole stock market, but the S&P 500 bottomed on Christmas. Yet, Chipotle stock didn’t hit its bottom until earlier this year when it reported earnings.
And that marked the absolute bottom that’s $247 per share. The stock had finally found value and the buyers stepped in.
On the way up, once the bulls broke through the lower high trend line first at $322 and then at $360 per share, the rally was on.
As a result, it came into the earnings up 171% from the bottom. Year-to-date CMG stock is up 65% versus the S&P’s 17%. It is also up twice more than Shake Shack (NYSE:SHAK) and five-times better than McDonald’s (NYSE:MCD).
Maybe this out-performance justifies the valuation that CMG now carries. Its price-to-earnings ratio is 115, which is almost five times that of MCD’s.
How to Approach Chipotle Stock
At these altitudes, one needs a lot of conviction to start buying CMG shares. I don’t have such gumption. Especially not when the S&P 500 is at all-time highs. Buying it up here means that the investor is committed to holding the stock for a really long time.
True, CMG stock is approaching its all-time highs. But therein lies a danger. The closer it gets to the accident scene the more likely it is to fade. There are a lot of investors who have been stuck at the highs who may decide to exit.
Therefore it makes more sense that as it rises here after the earnings it could run into resistance. Getting into Chipotle stock over $700 would be risky short term. This is not an obvious entry point.
This is nothing against the company itself but rather doubt of the price action that will unfold up here. And it’s definitely not saying to short it either. Doing so opens the trader up to unlimited losses. Those who insist on shorting it should use put options where the out-of-pocket exposure is finite.
However, CMG could be a trading vehicle for those who prefer trading it shorter term.
As CMG continues to slog higher, there will be resistance as it nears $725 per share. This was a major ledge from which it collapsed in October 2015. The onus is on the bulls to prove they can retake it and establish it as support once again.
Conversely, if CMG falls below the $685 zone it could trigger a bearish pattern that would target the prior pivot zone around $620. Then there is the open gap all the way to $540 per share. This is not a forecast, but it is a bearish scenario that I should know.
In summary, this is a stock that is too high to Chase and too hot to short at these altitudes. For those who are already long CMG, the price action here is great news.
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.