Chipotle Mexican Grill: Don't Catch the Falling KnifeCMG) drop as I expected the stock to continue its downward trajectory. Shares of Chipotle fell almost 5% since my last article, and my opinion of the stock still hasn’t changed. I am sill of the opinion that Chipotle Mexican Grill is a falling knife and investors should sell the stock.
The company has gone through various health issues in the last month, due to which 120 students of Boston College and half of the basketball team fell ill in a norovirus outbreak.
After suffering from the norovirus, new bacteria – E. coli adds to the negative impacts caused by the norovirus at Boston store. Two weeks later, a Seattle store was apparently shut due to health violations. The bad news for the company is that the recent scare comprises two more states and the situation is still not under control.
One of the main problems for the Chipotle is that the need for organic and fresh food is deceptively difficult to meet in a healthy way. Finally, the company plans to decrease its dependence on local suppliers that supported the company to differentiate it from the fast-food crowd.
The company also plans to hermetically seal cilantro, lettuce, and tomatoes in a bag at a central kitchen due to which the whole concept of healthier ingredients is difficult to probe. The typical consumers of the company perhaps do not want tomatoes sliced up and shipped in a bag. The end result is that consumers will be happy to consume products at Chipotle’s rivals using preservatives in their products over getting an illness.
Due to the current outbreaks, the customer perception of Chipotle Mexican Grill will get a lot worse. The problems raised by the health concerns caused in August 2015 was well on its way to recover until the norovirus and E. coli scare spread concern exploded. Given the string of incidents, Chipotle Mexican Grill’s same-store sales should drop considerably in the coming months, which will further put downward pressure on the stock. Given that Chipotle Mexican Grill is still priced for growth, I think falling sales in the coming quarters will push the stock at least down by at least 20%. Hence, I think investors should sell Chipotle Mexican Grill’s despite the drop.
Published on Jan 4, 2016By Akshansh Gandhi