Justifying Chipotle

If you trace back the 10 year chart of Chipotle (CMG), it is a 20 bagger if you started investing close to its IPO or thereabout. Post IPO, around 12 months after, price stabilized at the vicinity of 50x P/E. At that level, can one realistically say that one can be aggressively buying CMG, as if to say buy and hold for the long term at 50x P/E?. It is expensive and has remained expensive forever.

Such a feat of being able to achieve a multi bagger I believe can only be possible by a conviction on the company's long term vision and story. You have to love their product and also believe that their principals can execute their vision. If you look at Shake Shack Inc. (SHAK) today, post IPO, stock is trading close to 100x P/E and no one seems to be interested in selling their stock anymore. Buy and hold for the long term at 100x P/E. Personally, I believe in the product of SHAK, and also its Founder Danny Meyer, its strategy of customizing taste depending on geography, and its philosophy of prioritizing their employees above all else. I digress and say SHAK could probably well be another CMG in the making.

SHAK aside, the narrative behind CMG 10 years ago when it was going through its high growth phase was the usual new product, volume expansion story. By word of mouth, everyone liked the product. It has the potential to expand all over the US and even the world. At 50x P/E back then, it was justified. However today, doing at 40x P/E, the narrative is different. Because of the E-coli issue, the story was all about adjusting preparation procedures like marinating chicken the night before, and blanching vegetables before serving. And in terms of trust in management, how can you justify having a chief marketing officer that is involved in illegal substance . And in terms of potential growth, it is not the same as it was 10 years ago when it was expected to double almost every 2 years. These are narratives not worth the 40x P/E.

It is really difficult to justify investing in CMG at this valuation with the narrative of its potential being different or being not as good as it used to be. It also does not help that all the issues that the company is associated with now are things not supportive of higher valuations. The company is trying so hard to bring in customers, which will most likely hit their margins eventually. And lastly, wages are rising which is also be a hit on margins.

This is a bearish mosaic that I have formed through having read different articles about CMG. What alerted me to this stock is when its price fell below the 200 day EMA last November 2015.

Subway anyone?

Dislcosure: None

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