When it comes to investing in restaurants on Wall Street, Chipotle (NYSE:CMG) tops the list. They execute on plans flawlessly even during a crisis. It is not a surprise to see CMG stock up 39% year-to-date and up 157% in two years. Chipotle is a stock to own for the long haul and to buy on dips.
When the quarantine hit, I suspected that the metrics for CMG would get demolished like the rest of the world. But that was not the case because they reported an incredibly strong comparable sales figure in spite of the closures. As a former analyst of restaurant operations I respect the effort it took to get this done.
Large restaurants companies are not supposed to be this nimble. Operationally, it is near impossible to execute a system-wide adaptation to the test that Covid-19 dealt. Yet, the Chipotle team did it.
CMG Stock Remains the One to Buy Among Its Cohort
They remain head-and-shoulders above the rest, so CMG is the proverbial safe restaurant stock bet. “Safe” doesn’t have to mean “boring,” because CMG stock also delivers strong growth prospects.
Yes, usually growth stocks are risky, but this one seems to never miss the mark. And when sellers manage to break the trend, buyers quickly repair the damage so the effect is only temporary. Case in point: Chipotle set a new highs again this month without much improvement in the global business environment. Under the leadership of Brian Niccol the CMG team has been flawless. There is no reason to expect this to change any time soon.
Regardless of how great the stock is, I don’t like chasing new all-time highs. It is always better to wait for a dip to initiate or add position in CMG stock. The closer to $950 per share the better the bullish conviction will be.
While this seems impossible, remember that the stock was there less than two weeks ago. Nothing rallies forever and if it does, it becomes a disaster waiting to happen. There will be corrections and the sooner, the better.
As it is, CMG stock is very expensive in absolute terms and definitely compared to other restaurants. It has a trailing 95x price-to-earnings ratio which is almost Amazon (NASDAQ:AMZN) territory, but its stock is only 5.5 times its full year sales. While McDonald’s (NYSE:MCD) seems cheaper with only 26x P/E, its price to sales is 7x. This means that for a growth stock, CMG is not bloated.
The Nitty-Gritty About the Technicals
For the shorter-term traders, there is a good base near $1,045 per share. It has traded at or above it since May. The longer they linger above it the stronger the floor below it becomes. The bulls need to know that they have footing that they can trust.
Also, rallies need wide consolidation zones and that is how they can persist. The area between $940 to $960 has been in fierce contention since the giant February correction. First it served as a crash sight, then as a solid base for the last 20% increase that started in late June.
Only a drop to $812 would really flush the rally from the March bottom. This would fill the gap there and satisfy the folks who trade the Fibonacci 50% retracement levels. I would bet that for that to happen, the markets in general would also need to be falling hard. CMG stock has big support above $850 per share and buying that dip would be a solid investment move.
Using options this can happen now by selling the December $800 put and collecting $10 per contract for it. All this trade needs to win is for the price to stay above $790. Else it is pure profit with no out-of-pocket expense. Investors should sell naked puts only if they truly want to own the shares, else selling bull put spreads is the wiser decision.
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.