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buffalonate (94.85)

Chipotle Mexican Grill Takes A Beating

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October 18, 2012 – Comments (4) | RELATED TICKERS: CMG

Chipotle has now dropped from $442 to $250 in the last 6 months or so.  This crash was about as predictable as they come.  For awhile this company had a p/e ratio over 50 which is insane for a large restaurant chain.  I remember laughing at Jim Cramer when he was arguing that Chipotle was a better stock to own than Buffalo Wild Wings because the same store comps were stronger.  Cramer didn't seem to care that the earnings growth for Buffalo Wild Wings and CMG were almost exactly the same and that CMG had a p/e ratio almost twice that of Buffalo Wild WIngs.  Cramer as usual got wait too excited about fast growth and completely ignored the fact that the company was extremely over-valued.  Peter Lynch was one of the greatest investors of all time and in his book "One Up On Wall Street" he explains that a growth company is fairly valued when its earnings growth rate is roughly equal to its p/e ratio.  This advice has kept me from losing a lot of money by avoiding buying into the over-priced hot growth stock that is getting all of the publicity at the moment.   

4 Comments – Post Your Own

#1) On October 19, 2012 at 3:12 AM, awallejr (75.87) wrote:

Well that is the thing with momentum stocks.  Great for awhile but crashes hard once there is even a hint of a problem.  Personally I don't like Chipotle.  I think them way too expensive for a lunch.  I especially hate spending a lot on drinks which many eateries overprice because that is where the profit lies.  $2 for water?  Come on.

Bwld is a different company than Chipotle.  They really are selling a different product.

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#2) On October 19, 2012 at 3:08 PM, ikkyu2 (99.10) wrote:

Lynch also said, in "Beating the Street," that a company like Taco Bell, still in its aggressive buildout/growth phase, is a back-up-the-truck buy at a forward P/E of 20.  CMG pretty much is this decade's Taco Bell.

CMG's trailing P/E at 241 is about 26 and they're on track to grow domestic store numbers 13-15% over each of the next 5 years - good organic growth - and that's assuming comps never grow again, international growth doesn't happen, and that ShopHouse never takes off: three terrible assumptions.

I am a buyer at 241.  Check my blog for a bit more. 

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#3) On October 19, 2012 at 3:09 PM, ikkyu2 (99.10) wrote:

Also, regarding BWLD, I was a buyer at 55 and 68 and I am still happy to hold that position.  It's a great stock too.  Agree that valuation is always king; but just because BWLD is a good buy doesn't make CMG any less of one.

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#4) On October 19, 2012 at 6:05 PM, buffalonate (94.85) wrote:

I am not hating on CMG the company.  I actually bought 5K at $250 and will buy more if it drops.  I was just pointing out that you have to be careful how much of a multiple you will pay for that growth.  When cramer was comparing BWLD and CMG the earnings growth rate for both of them was low 20's, but the p/e for BWLD was 20 and the p/e for CMG was 40.  It doesn't take a genius to figure out that at the time BWLD was a much smarter buy.  Neither CMG nor BWLD are cheap right now but a 30 p/e for companies growing earnings at 20% is at least a sane premium to pay.

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