Chipotle Stock Needs a New Catalyst to Spice Things Up

Now that CMG stock has recovered, investors need a fresh narrative to justify its rich premium

For Chipotle Mexican Grill (NYSE:CMG) CEO Brian Niccol, life is grand. Due to several food-illness outbreaks, the Chipotle stock price fell to shocking lows in early 2018. However, similar to what Dr. Lisa Su did for Advanced Micro Devices (NASDAQ:AMD), management pulled off a remarkable recovery. Today, CMG stock has more than recovered, having reached all-time highs recently.

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Interestingly, one of the underlying reasons for the profound success of Chipotle, and by deduction, CMG stock, is “KISS.” Of course, this is an acronym for “keep it simple, stupid!” And while management certainly is the opposite of stupid, they have focused almost aggressively on simplicity. Walk into your local Chipotle frequently enough and you’ll notice that their menu hardly changes.

That’s by design. As Niccol stated, “When I got to Chipotle, the company had tons of ideas — an almost crippling [number].” Moreover, what sparked the recovery in the Chipotle stock price was also focusing on what works.

Thus, I found it interesting that Niccol offered a contrarian view on alternative meat companies like Beyond Meat (NASDAQ:BYND). In an interview with Barron’s, the CMG head executive stated, “I’m not sure plant-based foods that look and taste like meat are a long-term trend.”

As you’re likely aware, demand for plant-based meat products has skyrocketed. Undoubtedly, this new approach is far better for the environment and obviously for the animals raised for meat. If humans can satisfy their carnal desires with vegetables dressed up as a steak or a bacon slice, everyone wins.

However, as I argued recently, plant-based meats aren’t without their detractors. This alternative meat push also raises difficult questions for Chipotle stock.

Chipotle Stock Needs a Fresh Catalyst

Personally, I agree with Niccol’s hesitation regarding alternative meat products. Usually, you can’t have your cake and eat it too. This aphorism especially applies to stuff we put into our bodies.

Specifically, Niccol worries about the health implications regarding what is essentially fake meat. “But right now, the way [plant-based meat alternatives are] processed, it just wouldn’t match our brand purpose,” he stated.

Again, I agree. But if you’re a stakeholder in CMG stock, this sentiment from the top merits at least some concern.

First, the biggest competition (in terms of investment dollars) to Chipotle stock are jumping aboard the plant-based meat craze. We’re talking big names like McDonald’s (NYSE:MCD), which recently announced they’ll test plant-based burgers in 28 restaurants.

Yes, over time, the euphoria behind alternative meats may fade. But for the here and now, Chipotle risks losing a marketing opportunity.

Second and more importantly, companies like McDonald’s may benefit financially from integrating plant-based burgers into their regular lineup. That’s because the green alternative is cheaper because you completely take out the livestock element. Therefore, the move helps bolster the bottom line.

Significantly, this is where Chipotle stock falls short at the current juncture. Understandably based on the company’s prior scandals, its margins were gutted. For example, back in its operating and net margins were 17.3% and 10.6%, respectively. Now, they’re 8.7% and 6.4% in the most recent quarter.

Keep in mind, this is not criticism of CMG stock. I didn’t think the company could engineer such a comeback, so I’ve been proven very wrong. However, nothing happens without consequences.

In this case, the valuation behind the Chipotle stock price is incredibly frothy. To justify buying shares, the company needs a catalyst. Apparently, it won’t come from plant-based meat.

Take a Tactical Approach to CMG Stock

I’m not suggesting that Niccol reverse course and accept alternative meat into the Chipotle menu. He knows his customers the best. If they want naturally sourced ingredients, you give them exactly that.

That said, Chipotle stock is in a tight position. Sure, shares have outperformed, but that’s based in the past. What is the game plan moving forward? If management can’t provide a convincing answer, stakeholders may pocket some profits.

After all, there’s no compelling reason to hold CMG stock. Obviously, it doesn’t pay a dividend. And this is a growth stock that has already done a lot of growing.

Tactically, as a shareholder, you may want to trim your exposure, as well as pat yourself on the back. For those entering the game, just wait. Chipotle stock is likely to give you a discount.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/chipotle-stock-needs-a-new-catalyst-to-spice-things-up/.

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