To be fair, Morgan Stanley has a point about Chipotle (NYSE:CMG). The company has put its earnings growth into high gear, justifying an above-average valuation for CMG stock as the Tex-Mex eatery works to reclaim it former greatness. Sometimes the trajectory means more than the altitude.
On the other hand, it would be naive to believe CMG stock is going to make a beeline to $600 just because Morgan Stanley analyst John Glass says that’s what Chipotle shares are worth.
Reality: It’s an all-out war reaching a price target. Chipotle Mexican Grill may well be worth $600-per-share, but there’s a whole lot of tradin’ and wranglin’ that’s going to make the trip there quite the adventure. And, the journey’s not exactly getting started on the most buy-worthy foot.
Glass’ exact words made it clear he wasn’t ignoring the company’s “storied past”? He notes, “While still early days in the brand’s long-awaited recovery, there is increasing evidence that makes our bull case scenario more believable, including (1) a change in management, with an incentive plan designed to deliver the bull case in earnings (+$20 in EPS), (2) plenty of low hanging opportunities in marketing, product development and operational initiatives to drive sales, and (3) a more benign competitive environment.”
It’s enough to prompt an upgrade, from “Equal-weight” to “Overweight.” It was also enough to prompt a huge jump in Glass’ price target, which had previously been $413.
CMG stock responded unsurprisingly, gaining 6.6%, but leaving behind a gap between Tuesday’s high and Wednesday’s low.
It’s this gap that presents a conundrum for would-be buyers. Gaps are rarely left unfilled, and this is the third such gap CMG stock has left behind since February’s bigger-picture reversal.
CMG Stock: Too Hot to Handle
It’s a misnomer that all gaps on a chart are eventually filled back in with a retracement. It’s rare when they’re not, but it does happen. It usually happens, however, not because traders are intent on filling in prior gaps. It happens most because stocks are simply volatile.
As for Chipotle, stepping into the stock following Wednesday’s gap-making surge is an ill-advised idea, but not because of the gap it left in the wake of the move. It’s a poor idea because CMG stock is overbought and ripe for some profit-taking.
The 6.6% pop since Tuesday’s close is palatable. The 110% runup from February’s low is considerably less tolerable, inviting those fortunate enough to have reaped any part of the rally to bail out at the first sign of trouble. There’s too much risk to newcomers relative to the plausible reward. The three chart gaps in the rearview mirror only exacerbate that risk. Thursday’s lack of follow-through — and lack of interest for that matter — is also telling.
That’s not to suggest Chipotle stock is never ownable again. There are circumstances that could abate the risk.
Chief among them is a pullback that at least closes Wednesday’s gap and verifies there’s a technical floor somewhere between $426 and $475. The 50-day moving average line (purple) will also ideally be revisited and rekindle bullishness. Would-be buyers need to know there’s a safety net behind them before they’re fully willing to forge ahead. One more dip to prove there’s a technical base in the mid-$400’s should do the trick.
Until then though, it’s a little too likely newcomers are getting in at a short-term high. There’s also a little too much risk that there’s no floor in the $400’s at all.
The Last Word on Chipotle Stock
For the record, Morgan Stanley’s John Glass has a high opinion of Chipotle, but his is not in line with most everyone else’s stance. The average price target is $461.57, below the stock’s current price of $524.60, and the average rating on CMG stock is closer to a “Hold” than a “Buy.”
Glass is right in the sense that the current collective of opinions opens the door to future upgrades that could propel the stock toward $600. This isn’t a stock or a company, though, that analysts don’t keep close tabs on and frequently update their research on. Glass is seeing something few others are, which is bold, but may ultimately mean he’s misguided.
Whatever the case, even if the rest of the analyst community does eventually come around, it’s what could happen in the meantime — to the stock as well as the company — that still has the potential to incite profit-taking. The odds of further upside without some downside first just aren’t good enough.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
