You Can Short Chipotle Mexican Grill AgainCMG) for almost a year, last month I recommended investors to cover their short positions when the stock was trading at roughly $390. Although I had a $350 price target on Chipotle Mexican Grill, there was no margin of safety for new short sellers, which is why I recommended investors to cover their short positions way before the stock reached my target price.
Since then, Chipotle Mexican Grill has been on the up as the stock has appreciated almost 15%. The rally was primarily driven by the fact that Bill Ackman’s Pershing Square took a 9.9% stake in the stock.
Ackman’s advice has not been very helpful for many companies in the recent past as most of his investments have turned out to be bad. Although Ackman is a billionaire and has been a proven successful investor, his last two years have been woeful and Chipotle Mexican Grill may not be the right stock to turn his fortunes around.
That being said, Ackman bought the stock at under $390, and has already benefited considerably from it.
However, will Chipotle Mexican Grill continue its recent rally? I don’t think so.
Image by adoproducciones / Pixabay
Ackman said Chipotle Mexican Grill is undervalued but the fundamentals paint a completely different picture. Chipotle Mexican Grill’s profits have plummeted at a faster pace than its share price, which is why its trailing P/E is currently over 60, which by no means is cheap.
Considering that Chipotle Mexican Grill spent hundreds of millions of dollars on buybacks, the valuation is unjustifiable and the stock deserves to be trading under $400. Chipotle Mexican Grill’s comps have dropped considerably and its damaged brand reputation will further hurt its chances of growing. Chipotle Mexican Grill will likely open a lot less restaurants that it had planned, and I expect its growth to underwhelm going forward.
Thus, given that Chipotle Mexican Grill is not a growth stock for now and that its valuation is insane, I think investors can again consider taking a short position in the stock. I expect Chipotle Mexican Grill’s growth to underwhelm and fundamentals will eventually catch up, pushing the stock to lower levels.
My price target for Chipotle Mexican Grill is still $350, and I think investors now have enough safety margin to consider shorting it.
Disclosure: No Position
Published on Sep 12, 2016By Ayush Singh