Today and tomorrow are your lucky days.
In the last two weeks, I’ve had two different opportunities to take a “Walk Down Main Street” to experience a few publicly traded restaurants. The results… two different trade ideas for this Week’s Fast Profits as a Bull/Bear combination.
I’ll hit the bullish idea today and then wrap up the week with the bearish idea tomorrow.
First the Bullish idea: Chipotle Mexican Grill (CMG).
The Fundamentals: Bullish
It’s funny how you can almost avoid a restaurant for years and then have one of those “why haven’t I been eating here?” moments.
It’s even funnier when you have that moment because of your 80-year mother.
Let me explain.
My father recently spent almost a week in the hospital. As most children would do, I made myself available to take care of everything, including meals for my mom.
The first day, I was preparing to leave his room and said, “I’m going to go home and cook mom some dinner.” “No,” my dad replied, “just pick up a bowl at Chipotle, it’s been a long day, and you don’t need to cook.”
He rattled her order off in about ten seconds and I was off to Chipotle. In my head I was thinking “why is my 81-year-old dad sending me to Chipotle and why did he know that order off the top of his head?”
I should add here that I hadn’t had Chipotle myself in more than 10 or 12 years. They were off my “list.” It’s not that the food was bad when I went last, it was just that it was too much of it and it felt expensive.
My dad explained that Chipotle is one of the places they grab something quick because of the food, prices, and service. What the…?
I probably don’t need to tell you what it was like, you’ve been. The long line moved quickly. $9 for a burrito bowl that was made with fresh ingredients. Both my mom and I had leftovers for lunch the next day.
It hit me that I had missed a great “Walk Down Main Street” trade for years now.
These “walks” are meant to give me a simple view of a company’s fundamentals. What makes the company work and whether the business is doing well. You can often tell that by putting “boots on the ground” better than you can looking through financials. But here are the financials for CMG stock.
Over the last five years the company has continued to grow profitability and margins. Revenue and earnings have held a steady pace. Chipotle’s margins took a hit in 2023 because of the surge in inflation, but year-over-year comparisons remain healthy.
Chipotle’s margins run about 10% better than peers in their sector, but here’s the thing… Chipotle’s product is in a “sweet spot” for pricing. Compare their prices to McDonald’s (MCD) and other fast-food restaurants and the $9 burrito is an incredible bargain that pays large margins.
From a fundamental perspective, the stock is solid.
Sentiment: Bullish
Gauging investor sentiment is an important part of my analysis process.
Sentiment can tell you when the market’s expectations are too high or if a stock has become a “crowded trade.”
A crowded trade simply refers to a stock that has become so popular that everyone owns it. In those situations, a simple misstep – like an earnings report that misses expectations – will result in extreme selling pressure on the stock.
Chipotle’s sentiment picture suggests that the stock in not a crowded trade.
Wall Street’s analyst’s view on the stock is generally bullish, but only 65% of the analysts covering the stock have it ranked a “buy.” The remaining 35% recommend the stock as a “hold” or “sell”.
Stocks that see recommendations above 80% are considered over loved.
Short interest on Chipotle stock is moderate with a short interest ratio of 3.2. For comparison, McDonald’s current short interest ratio sits at 2.4, indicating that there are more bears shorting Chipotle than there are McDonald’s.
Finally, the options market remains relatively neutral on Chipotle shares.
Recent option activity has seen more puts trading than calls. This tells me that the options market is seeing more bearish predictions on the price of Chipotle. I like that as it is a sign that there is a “wall of worry” for the stock to climb.
Overall, the sentiment read on the stock is bullish, leading to the technical view.
Chipotle Technicals: Bullish
Year to date, Chipotle’s shares are trading 35% higher. That’s three times the return of the tech heavy Nasdaq 100.
Chipotle stock is part of the consumer discretionary sector, which is trading lower for the year by -2%. Many of the restaurants that share that discretionary space – like McDonald’s and Darden (DRI) – are trading lower for the year by 10% or more.
Hint, we’re talking about one of the companies I just mentioned tomorrow.
Shares of Chipotle currently trade above their bullish 50-day moving average, while they are below their neutral 20-day trendline.
The bullish 50-day moving average suggests that the stock has a 67% chance of closing each trading day higher.
The stock remains in a long-term bull market trend and the recent consolidation is setting CMG shares up for a bullish volatility surge to new highs.
While it doesn’t count as a “technical”, Chipotle will execute a 50:1 stock split on June 26. This will take the price from its current $3,000+ price to about $60.
Stocks splits do not create value or change the technical trends, but they do make the stock seem more “affordable” or a “value” for investors. Because of that, we often see a surge of buying ahead and after stock splits. I expect this to be a bullish catalyst for Chipotle as we head into the end of June and through July.
Bottom Line: How Do You Trade This?
First, let me disclose that I am a holder of Chipotle stock as well as long-term LEAPS on the stock.
That said, there are a few ways to trade the stock.
The first is a straight purchase of CMG shares at their current price. We are seeing some selling pressure in the market, so those investors looking to get the stock at a lower price may consider using a limit order for CMG at $3,000. That price represents a slight dip below the bullish 50-day moving average which should act as support.
Given the stock’s high price, the long-term call options are priced at $20,000 and higher per contract making them expensive for most investors.
My preference is the January 16, 2025 $3,100 calls currently trading for $31,700 per contract. In this rare case, were I considering opening a call option position on the stock I would wait until the stock trades after the split on June 26, 2024.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.