And once again Chipotle ($CMG) is in the news for business operations negligence. Where the hell is the local Department of Health? E-coli, customer credit card hacks, novovirus and now rats falling from ceiling – Are You Sure That’s Pork?. As the tried and true adage declares, “where there’s smoke…” – Short Seller Journal subscribers have been short CMG since 5/7 at $475 – it’s now down $110 in 10 weeks and still trading at 113 p/e…
I stopped eating at Chipotle the second I heard about the e-coli thing. Used to grab dinner there at least once a week. Have not been back. Along the way I’ve avoided the credit card hack to their payment system that surface a few months ago. Now it looks like there’s another viral outbreak at Chipotle of some sort: Virginia Chipotle Closed.
I presented the idea of shorting CMG in the Short Seller’s Journal in the May 7th issue:
This was my rationale:
“I personally used to eat at Chipotle once a week before the e-coli problem. I have not been back since then. This is probably not he last we’ll hear of issues like at CMG. After the most recent unjustified bounce in the stock up to $475, CMG still sells at a 147 p/e. This is an insane p/e. With restaurant revenues declining across the industry, extremely overvalued stocks like CMG are vulnerable to big cliff-dives. You can see in the graph above that the stock appears to rolling again for another trip below its moving averages and under $400, at least. This is confirmed by the RSI and MACD indicators.
Wall St. was gushing over CMG’s Q1 2017 performance as it exceeded expectations with revenues up 28% vs. Q1 2016 and net income $46 million vs a loss in 2016. But don’t forget that Chipotle’s Q1 2016 was hammered by the e-coli scare. The more appropriate analysis is to look at Q1 2017 vs. Q1 2015.
It’s an entirely different story if you compare Q1 2017 to Q1 2015, where Q1 2015 was on the books before the e-coli problem. Revenues in Q1 2017 were $1.07 billion vs. $1.09 billion in Q1 2015. Net income in Q1 2017 was $46 million, or $1.60 vs $122 million in Q1 2015, or $3.98/share. If we consider Q1 2017 and Q1 2015 to be more of an “apples to apples” comparison, Q1 2017 was not good. Furthermore, CMG had 2,291 stores open at the end of Q1 2017 vs. 1,831 at the end of Q1 2015. Looked at on a revenues per store basis, Q1 2017 was a total failure vs. Q1 2015. But Wall St and company management will not discuss this type of comparison and the morons buying the stock will not look for it.”
In addition to presenting the idea and the fundamental rationale, I suggested a couple strategies for playing the down-side, including using January 2018 puts. Than January 2018 $350’s have been a home run. By the way, CMG is still insanely overvalued.
Several ideas have been working since last August and have been working really well since January. This is because beneath the marquee indices, many stocks are at 52-week or all-time lows. You can check more about how this service works here: Short Seller’s Journal information. There’s no minimum monthly term requirement but the churn rate to this SSJ is surprisingly low.