Shares of Chipotle (NYSE:CMG) finally saw a little push back after a monster rally. Chipotle stock is up an incredible 65% so far this year, making it the second-best performing stock in the S&P 500 for the first quarter of 2019.
Certainly, some of the move higher was deserved given that CMG handily beat earnings expectations on Feb. 6. The latest leg up, however, is starting to get a little extreme from both a fundamental and technical standpoint. The red-hot rally in Chipotle is ready to simmer down.
The most recent earnings report was a definite beat, coming in well above expectations on both the top and bottom line. The reaction in Chipotle stock since then has been even more impressive.
CMG stock is up another 20% since exploding higher by 11% the day after earnings for a total gain exceeding 30%.
This puts the current price-to-earnings ratio for Chipotle at well over 100 and also well above the average P/E of 85 over the past five years. Other metrics, such as price-to-sales and price-to-free-cash-flow, are also at similar lofty levels. Price-to-book is at the highest reading ever for CMG stock.
It’s certainly not a cheap stock.
The technical backdrop also paints a picture of extremes. The 14-day RSI reached the highest levels in the past year at almost 90 before finally weakening slightly. Chipotle stock had been up 14 out of the past 16 days before finally reversing yesterday. CMG is also trading at the biggest premium to the 20-day moving average in the preceding 12 months. Prior times that this occurred, it inevitably led to a pullback in the shares.
The MACD, however, failed to confirm the rally with the most recent peaks well below the highs reached at the beginning of the rally. More important, though, was the price action from yesterday.
Chipotle stock opened higher and ran to a new recent high at $715.62 before selling off sharply to close lower on the day at $705.74. This type of reversal pattern is many times indicative of a top in a stock, especially following such a massive move higher. The buyers may finally be exhausted and the momentum looks to finally be broken.
Bottom Line on Chipotle
Longer-term traders should look to short Chipotle stock on any rally. Meanwhile, option traders may want to consider selling the April $750 calls and buying the April $755 calls for a net credit of 75 cents.
The maximum gain on the trade is $75 per spread with a maximum risk of $425 per spread for this bear call spread. Return on risk is 17.64%. The short, $750 strike price provides a 6.3% upside cushion to the $705.74 closing price of Chipotle stock.
Earnings are due April 24, so the spread will expire before then to avoid any earnings-related risk.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.
