Chipotle Stock Price Will Have More Trouble in Near Term

The Chipotle stock price rallied 3.4% yesterday (Tuesday) after shares plunged 12% last Friday. But the near-term outlook for Chipotle Mexican Grill Inc. (NYSE: CMG) stock is still in trouble...

chipotleChipotle announced Oct. 30 that it would close 43 stores in Portland and Washington state because of an E. coli outbreak. The company stated on Nov. 20 that the E. coli outbreak had spread to four additional states: New York, California, Ohio, and Minnesota.

The CMG stock price rallied back up to 4.50% Monday, closing the day at $559.29. Yesterday's 3.4% climb put the Chipotle stock price at $578.19.

Money Morning Technical Trading Specialist D.R. Barton said the stock was seeing a "rebound rally" following Friday's overreaction by buyers and sellers.

But that offers little solace for CMG shareholders who were previously riding the 52-week high price of $758.61 hit in August.

And looking ahead, there's not much reason to be optimistic about the Chipotle stock price in the near term.

Why the Chipotle Stock Price Will Drop More

The CMG stock price will still be extremely volatile over the next several months. Chipotle is unsure of the source of the outbreak, which means the company has no idea where the bacteria may have spread or how many additional people have been infected. Chipotle also has yet to identify a specific source for the outbreak.

According to Reuters, Maxim Group analyst Stephen Anderson expects more cases to be reported soon. Anderson also expects that the outbreak could hurt Chipotle's store traffic for the next several quarters.

But Barton did note a tiny piece of positive news for Chipotle on FOX Business. There have been no new outbreaks in the states where the first breakouts were reported.

Barton warns investors that the Chipotle stock price will be extremely volatile now and in the foreseeable future. "In the intermediate term, I don't like Chipotle," Barton stated, but said he still likes it long term.

The Chipotle E. coli outbreak is certainly disturbing, but unfortunately, it's not the first time this type of outbreak has occurred.

In 1993, 623 people contracted E. coli from Jack in the Box. Four children died, and many of the afflicted individuals suffered long-term complications. In 2006, Taco Bell's lettuce was the common link in 71 reported E. coli cases.

Not surprisingly, it took time for these restaurants to regain customer confidence. Barton noted that same-store sales for Jack in the Box and Taco Bell dropped for over half a year after the outbreaks.

Chipotle will lose money because of customers afraid to dine there, and the company has lost revenue by having to shut down stores. Analysts believe that the remedial costs from the outbreak will cut into margins in this quarter and next, according to FOX Business.

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Because of the news, analysts at the Maxim Group drastically lowered its price target for CMG from $718.00 to $585.00. Bank of America went one step further and dropped its Chipotle stock price target from $750 to $470. Sterne Agee downgraded Chipotle stock from "Buy" to "Neutral," but it kept the same price target of $766.

The Bottom Line: The health of the Chipotle stock price depends on how quickly customers regain confidence in the company. If it takes half a year or more, the Chipotle stock price will continue to drop because of decreased in-store sales. The Chipotle stock price now hinges on how effective the company is at remedying the situation and making sure no new outbreaks occur.

Jack Delaney is an associate editor for Money Morning. You can follow him on Twitter and follow Money Morning on Facebook.

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