Chipotle Mexican Grill's Crash Will Start SoonCMG) have fared well despite the company reporting terrible same-store sales numbers. According to the reports, Chipotle’s same store sales plunged over 33% in January and February also recorded a 28% dip despite the extra leap day this year.
Given the decline, I am quite surprised that the stock is still trading at such a premium. However, there is an explanation to it. I don’t expect Chipotle to continue commanding such a lofty valuation, which is why I think investors should short the stock at this point in time.
Buybacks will end
The only reason Chipotle Mexican Grill is still trading at 31x trailing earnings is because of the extensive buybacks.
It was recently reported that Chipotle’s top executives are rewarded on the basis of the performance of the stocks, which is why I think the management has sanctioned such a massive buyback in a short period of time.
However, Chipotle can’t keep using its money to keep the share price up. The strategy is unsustainable and as soon as the buybacks end, I could see Chipotle’s stock falling to under $400. Hence, for this reason, I think investors should short Chipotle Mexican Grill.
As mentioned above, Chipotle is trading at 31x earnings. Given the steep decline in same-store sales, I don’t think Chipotle will be able to justify this valuation once the buybacks end. I am expecting Chipotle’s comps to fall about 30% for the month of March as well.
Due to the amount Chipotle has spent on damage control, there’s a good chance that the company will report an annual loss this year. In the middle of so many headwinds, I am quite confident that Chipotle will fall to under $400 after the buybacks end.
The buybacks may have kept Chipotle’s price up, but is not sustainable. The company has spent a lot of cash in keeping the share price up and after the buybacks end, shares will crash. I think Chipotle’s fair value is under $400, which is why I would recommend investors to short the stock. Given the current valuation, I think investors can gain at least 15% profits in a very short period of time by shorting the stock.
Published on Mar 24, 2016By Ayush Singh