Shares of Chipotle (NYSE:CMG) rose more than 10% in late April after the fast-casual Mexican eatery reported better-than-expected first-quarter numbers and management sounded an optimistic tone about business trends during the novel coronavirus pandemic. This pop continues what has been a torrid run higher in CMG stock over the past month.
From its lows in late March, CMG has risen more than 110%. That means this $20 billion fast-food company has more than doubled in value in about a month.
That’s a huge rally in a short amount of time. Can Chipotle stock keep it up?
I doubt it. The reality is that the best of the CMG recovery rally has already come and gone. Shares are essentially back to where they were pre-Covid-19, the valuation is full, and there’s bound to be some coronavirus-related hiccups on the horizon.
As such, I wouldn’t chase this rally in Chipotle stock. If anything, I’d fade it.
The V-Shaped Rebound and CMG Stock
One look at the Chipotle stock chart, and it’s easy to see that the V-shaped rebound in this stock has mostly already materialized.
That is, shares have come nearly full circle. From February 19 to March 18, CMG stock dropped from $940, to $415. From March 18 to April 22, shares have rallied from $415, to $890.
At $890, CMG stock is now just a stones throw away from its pre-Covid-19 highs, implying that “things aren’t as bad as feared” is already mostly priced into the stock.
Further upside, then, will be harder to come by. The company won’t just have to prove that its business will weather the coronavirus storm. The company will have to also prove that its traffic, revenue, and margin trends can and will fully recover very soon.
My long-term model on Chipotle has not changed much as a result of the coronavirus pandemic.
Big picture, I still see Chipotle as a dominant fast-food chain which will, over the next several years, continue to open over 100 new locations per year, drive consistent 3%-plus comparable sales growth, push operating profit margins back closer to the 20% level, and produce big profit growth. Under those assumptions, I believe Chipotle can hit $50 in earnings per share by 2025 (versus sub-$10 expected this year).
Historically, restaurant stocks normally trade around 25-times forward earnings. Based on that industry-average multiple and a 10% annual discount rate, a fair 2020 price target for CMG stock is $850.
In other words, at $890, Chipotle stock is slightly overvalued.
Hiccups on the Horizon
Considering that shares have come full circle and are slightly overvalued, CMG stock looks unnecessarily risky today with the coronavirus pandemic still spreading across the nation.
In essence, CMG stock is priced for perfection right now. Perfection won’t happen.
The coronavirus pandemic will inevitably cause hiccups in Chipotle’s business over the next few months. Maybe hesitant consumers don’t go to stores as much when they re-open, causing traffic trends to remain depressed for longer. Or maybe the re-opening of stores with lower traffic volumes puts pressure on profit margins. Or maybe the digital business starts to fade some as other restaurants open their doors, too.
All in all, there’s plenty of room for lots to go wrong in the Chipotle recovery over the next few weeks to months. Very little of that is priced into CMG stock today.
Bottom Line on CMG Stock
Chipotle stock is a long-term winner. That’s why I said buy the coronavirus dip in this stock.
But the best of the CMG recovery rally has already come and gone. Up near $900 with the coronavirus pandemic still spreading across the nation, CMG stock is fully valued with big operational risks on the horizon. That’s not a recipe for success. Instead, it’s a recipe for choppy trading over the next few months.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long UBER.