Chipotle Mexican Grill Shorts Should Book Profits

I have been bearish on Chipotle Mexican Grill (CMG) since the E.coli incidents started. Since then, Chipotle Mexican Grill has lost over 40% of its value. Despite the drop, Chipotle Mexican Grill is still more expensive from a fundamental point of view primarily because the company’s earnings have dropped at a faster rate than the stock.

Back when I recommended selling the stock, Chipotle Mexican Grill was trading at over 30x trailing earnings. Currently, Chipotle Mexican Grill’s trailing P/E stands at over 57. Given the stock’s valuation, it is safe to assume that it has more downside to offer.
I even changed my price target from $400 to $350 after the stock fell to under $400.

While Chipotle Mexican Grill may have more downside to offer, I think investors shouldn’t consider shorting it at current levels. Investors who did short the stock when I recommended it should probably cover their positions and book profits.

Historically, Chipotle Mexican Grill has always traded at rich valuations. Although at a P/E of 57, Chipotle Mexican Grill is ridiculously expensive, I don’t think there is enough margin of safety to short the stock.
Chipotle Mexican Grill Shorts Should Book Profits
Image by adoproducciones / Pixabay
Short interest in Chipotle Mexican Grill has shot up considerably over the last few months and even the slightest bit of positive news can send the stock soaring,

Moreover, Chipotle Mexican Grill has been buying back shares extensively, which is providing support to its share price. To put this into perspective, the company plans to spend over $1 billion on buybacks, which translates to roughly 9% of its entire market cap.

In addition, buybacks not only offer support to the stock, they also boost the company’s earnings. Chipotle Mexican Grill’s EPS will increase considerably due to these buybacks, which in turn will help in bringing down the stock’s ridiculously high valuation.

Conclusion

Chipotle Mexican Grill may be trading at a very high trailing earnings multiple, but, as mentioned above, the company’s valuation may come down in the future due to buybacks. The stock has always traded at a premium valuation, and although it is trading at a higher multiple right now, the recent share buybacks will increase the company’s EPS, which in turn will bring down its valuation without having a negative effect on the stock price.

Thus, I think investors should not look to short Chipotle Mexican Grill at this point in time. Investors who did short the stock should look to cover their positions and book profits.

Disclosure: No Position
Published on Aug 19, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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