December 7, 2021

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Bear of the Day: Chipotle (CMG)

Chipotle (CMG) is a Zacks Rank #5 (Strong Sell) that is a popular Mexican restaurant chain. The company has seen success focusing on burritos, burrito bowls, tacos, and salads. The growth and earnings momentum has created one of the hottest stocks over the last ten years.

The company is valued around $23 Billion and had a forward PE of 100. The valuation is troubling considering most of their restaurants are closed to in-dining due to COVID-19. With earnings coming on April 21, investors should consider selling or even shorting before the print.

COVID-19 Effect

I love Chipotle like most people, but a big part of their business has disappeared after the lockdowns prevented in restaurant dining. According to SunTrust, at 47.6% of Chipotles stores are located in counties with at least 1000 cases of COVID. Yes, Chipotle is having success with delivery and pick up. So the question is if there is enough success in this current environment to make up for lost sales.

Stock Bounces Back

The March sell off was brutal, with plenty of stocks losing half their value in a matter of weeks. Chipotle was not spared, with the stock falling from $940 to $415 in four weeks. The stock bounced quickly off the lows along with the market, but has come all the way back to the 200-day moving average above $800. This is a technical level that should find resistance after a 100% up move from lows. Adding in the potential for poor earnings result won’t help the stock price.

Valuation Earnings and Estimates

Chipotle has a premium valuation over other restaurant chains. Zacks gives a Style Score of “F” in Value, which could be big issue with earnings this week, especially when evaluating the near-term outlook.

While Chipotle is one of the more stable restaurant chains, the expectations for the quarter and immediate future all falling fast. Over the last month, estimates for the current quarter have dropped 34%, from $3.78 to $2.46. For the current year, we have seen a 56% drop, with estimates going from $18.48 to $8.14. Even looking to 2021, we see a 17% drop, which indicates no quick recovery as the stock has showed.

Earnings on 4/21/20

The thesis for the bulls involves a quick bounce back once the lockdowns are lifted. While the stock has already priced in such a scenario, the earnings story will have to be pretty good to avoid a selloff. Investors should expect a miss on both the top on bottom lines this week. The near-term outlook should be pretty bleak, which will make the stocks chances of going higher from here fairly low.

In Summary

Until there is some clarity on the impact of COVID and the lockdowns, restaurant stocks should be avoided.  Given that CMG has bounced so much, investors looking to play the earnings should look to sell current holdings, hedge or even short.

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