Chipotle Mexican Grill (NYSE:CMG) reports its Q2 2019 earnings July 23 after the markets close. Regardless of what it says about the top- and bottom-line, I’m wondering if the company’s second-largest shareholder is going to hang around to see where Chipotle stock goes next. 

Bill Ackman’s Pershing Capital Management owns 6.4% of CMG stock, or approximately 1.78 million shares. As I write this, CMG is trading around $764. That means Pershing’s stake is worth $1.36 billion.

Ackman purchased 2.88 million shares of Chipotle stock at an average price of $405. He has since sold off approximately 1 million shares, most of them sold last summer in the high $400s. 

Pershing has made approximately $85 million on the 1 million shares sold to date, and it’s sitting on an unrealized paper profit of $639 million in less than a year. That’s a cumulative return of approximately 62%. You can do the math. 

What’s important is that Chipotle, and Ackman, are at a tipping point, of sorts. 

Is the next Chipotle earnings report the beginning of an even better story for the sometimes-maligned restaurant chain? Or, is this as good as it gets?

The answer is in the hands of the gods. 

However, if you were Bill Ackman, would you let your profits ride, or would you take some or all of your position off the table?

Here are my thoughts on both sides of the argument. 

He Should Stay

Make Chipotle Great Again. 

That seems to be the rallying cry of CEO Brian Niccol, who Ackman helped recruit from Taco Bell, in 2018. 

CNN Business named Niccol CEO of the Year in 2018 in large part because of the work Niccol and the rest of Chipotle’s management team did to revitalize the brand. It seems that everything Chipotle did was on the table for discussion. 

Niccol planned to deliver a better experience for its customers by adding delivery, changing up the menu, reducing order wait times, and emphasizing all the quality ingredients it uses. Oh, and it also raised prices, something analysts were pushing.

The results of these changes have delivered real growth in revenues, same-store sales, profits, and of course, a higher stock price. 

Since Niccol was announced as Chipotle’s new CEO on February 13, 2018, CMG stock is up 145%, seriously outperforming its restaurant peers in the process. 

As Chipotle prepares to report Q2 earnings — analysts expect revenues, same-store sales, and profits to jump 10.8%, 8.1%, and 28.9%, respectively — it’s important to remember that Chipotle had a blowout first quarter.

With digital sales becoming a more prominent part of Chipotle’s business, I would expect the second-quarter report to be a walk in the park. 

I’m not a technical analyst so I couldn’t tell you whether the good news expected July 23 is already baked into its stock price. What I can say is that Chipotle’s got its groove back, which is good news for Ackman and the rest of CMG’s shareholders. 

He Should Sell Chipotle Stock

“Don’t look a gift horse in the mouth,” goes the saying. 

Bill Ackman was the poster boy for poor-performing hedge fund managers until he focused on a few core holdings in 2019. Holdings like Starbucks (NASDAQ:SBUX) that have been able to avoid any food safety scare. That dramatically improved Pershing Square’s performance. 

A 62% return in less than three years is nothing to sneeze at. There’s no crime in taking some profits off the table redeploying that capital into a position that hasn’t had nearly as good a run over the past 18 months. 

It’s possible that Niccol’s only scratched the surface of Chipotle’s potential. It’s equally likely that this is as good as it gets. 

Take the money and run, Bill.  

The Bottom Line

It’s not easy rehabbing a fallen brand. 

The fact that Brian Niccol has been able to do so is a credit to his entire team. And you can’t forget Executive Chairman Steve Ells, who stepped aside in late 2017, understanding that Chipotle needed a new person leading its turnaround. 

So, if I were Ackman, and I’m certainly not, knowing how hard it is for a restaurant brand to rebound from a food safety scare, I would think twice about exiting his Chipotle position because America loves a comeback story. 

Chipotle is one for the ages.  

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.