Sometimes you Just Buy What You Know… and that’s exactly what Chipotle customers are going to keep doing.
I call it the walk down Main Street. If you’ve followed me you know exactly what I’m talking about. If you don’t know, take the next five minutes to read about it, it’s worth a 20% profit on Chipotle (CMG) shares.
Chipotle stock got clobbered on Tuesday. News that the company’s CEO would be leaving to take the same role at Starbucks (SBUX) sent Chipotle investors into as selling frenzy while Starbucks shares shot higher by more than 20% on the news.
Here’s the thing, you’re not going to notice much of a change at the “Main Street” level for at least 12 months.
For that matter, do you think the “Main Street” consumer even knows that a change at the helm of both companies is coming in September?
No way, my guess is that it is beyond a smart money bet to wager that the average person even reading this right now knows the names of both CEO’s involved with this “trade”.
My point is that a fundamental like this is not going to change the course of either of these stocks over the next 6-12 months.
The CEO of a company is the visionary. The person that sets a long-term course for the company. The type of course that takes a long time to show results to the company’s bottom lines.
This is why as investors you and I need to look at something that is a little more relevant to where these companies are heading, up or down over the next 6 months. That’s how we make money.
Here’s the Breakdown
We’ve heard all about the consumer turning sensitive to their spending over the last three months.
This stems from fears that the economy is heading for a recession, forcing the consumer to question their spending and where they can make cuts.
I don’t have to tell you that $10 Coffee is at the top of most consumers lists when it comes to tightening the belt. Starbucks customers have already figured it out too.
Starbucks revenue over the past five years is charted below. Note the “Post-Pandemic Bump” that occurred at the tail end of the pandemic. This is when consumers were going out and spending all of the money saved during the “lock downs”.
Not surprisingly, Starbucks saw their revenue pop as their customers rushed back into the stores to get their fix. Price didn’t matter then, we weren’t facing inflation and a possible recession, they are now.
The “luxuries” like Starbucks, expensive makeup – look at Ulta’s (ULTA) price down 38% over the last 6 months - and other discretionary purchases aren’t making the cut when it comes to household budgets.
That’s the problem that the new CEO of Starbucks will have to fight when he takes the job in early April, and the company’s revenue problem is not going to be solved over the course of a few quarters.
For that reason, this week’s rally should be seen only as a short-term opportunity for the bulls when it comes to Starbucks stock.
The 20% rally puts Starbucks in a position that will allow investors that have been holding the stock through its painful 40% decline from its highs to cash out and reallocate to more growth-oriented areas of the market.
No, it’s not over. The brand remains a staple in the consumer world, but it’s going to take time to reinvent itself to get back to the growth trajectory that made it a leader in the market.
For that reason, new CEO or not, Starbucks shares maintain a neutral-to-bearish outlook with a price target of $75.
If you didn’t catch it months ago, check out my "Walk Down Main Steet" on Chipotle by clicking here.
My walk down Main Street remains the same on Chipotle, the stock represents a value in the fast casual space.
Which is exactly why Chipotle has been able to maintain their revenue targets over the last five years.
Chipotle’s revenue grew 18.2% to maintain a trend of revenue growth of 14.3% for the last year. That’s in comparison to Starbuck’s revenue growth of 4.3% over the last year.
We can go through the fact that Chipotle’s earning per share results continue to beat the market’s expectations while management continues to see improved operations, but all of that comes through in the stock’s price activity.
Chipotle shares are trading 30% off their recent highs, much of that is due to a healthy correction in the stock after reaching new all-time highs in June.
That healthy correction just got a shock with the news of the company’s CEO moving to Starbucks. Also pressuring the stock was the announcement that Chipotle’s CFO would be leaving the company in the first quarter of 2025.
Chipotle is still seen as a value player in the restaurant industry. This has always been one of the company’s pillars.
During the “great Recession from 2007-2009 Chipotle operated much as it does today, as did Starbucks.
Comparing each company’s stock prices during that period shows Chipotle’s ability to ride tougher economic times better than Starbucks.
During the Great Recession, Starbucks dropped around 70% of its market cap as the consumers looked for alternatives.
Over the same period, Chipotle shares dropped around 10%, with one big difference. Chipotle spent the first half of the recession rallying from $1.20 to $3.00 (150% gains) as the company continued to see steady revenue and earnings.
Bottom line, there’s value In being a “value product”, and that’s exactly what Chipotle offers.
The recent events for Chipotle have pulled the stock below its 200-day moving average.
Shares remain in a long-term bullish trend as they trade well above their 20-motnh moving average.
Considering the outlook for revenue, even with a potential recession looming over the economy, the recent 30% pullback offers long-term investors an opportunity to add Chipotle shares at a relative “bargain”.
A cross back above the 200-day moving average and $55 will trigger a buy signal for technical traders.
Shares of Chipotle maintain a long-term bullish outlook with a price target of $70.
