So far this decade, Chipotle Mexican Grill (NYSE:CMG) stock crushed it during the pandemic bull market. The stock recovered strongly in 2023, reaching a new all-time high in December. Since then, however, shares in the fast casual restaurant chain operator have pulled back. Following last year’s big rebound, the stock also sports an arguably-rich valuation for a mature consumer stock.
With this, it may be reasonable to say that Chipotle is a “priced for perfection” stock. In other words, a stock that is at risk of a big price decline on disappointing news/results. Yet while all of this may suggest that there’s more that could knock CMG lower than drive it higher in the months ahead, you may not want to jump to that conclusion.
CMG Stock, Recent Declines, and Upcoming Earnings
Chipotle stock’s slide in recent weeks likely has more to do with the market’s general direction during that time than anything company-related. The “Fed pivot” enthusiasm of late last year has faded somewhat. It was this enthusiasm that pushed stocks across-the-board higher during November and December, especially growth stocks like this one.
But even as the market is possibly regaining its bullishness, that doesn’t guarantee higher prices ahead for CMG stock. This time, factors more directly related to fundamentals/valuation may have an impact on the performance of shares.
For example, Chipotle’s next quarterly earnings release (set to happen post-market on Feb. 6) could be a make-or-break moment for the stock. Even if the company beats on earnings, CMG’s “priced for perfection” status may mean investors will react negatively to any partial misstep, using it as an excuse to bail/take profit.
That happened back in July, after the release of Chipotle’s Q2 2023 results. Despite an earnings beat, a slight-miss on same-store sales was enough to drive a modest post-earnings pullback. Then again, taking some other factors into account, the next few earnings releases (not just the upcoming one) could bring about many positive surprises.
Why it May be Unwise to Fade This Favorite
Just 2.57% of the outstanding float of CMG stock is currently sold short. Few on Wall Street are fading this stock, and that may be sign that you shouldn’t try to fade it yourself with a bearish wager. Sure, on paper, it may seem like a potentially profitable trade.
After all, a longstanding destroyer of growth stocks (increased sign of a growth slowdown) could really drive a big reversal for shares, right? Maybe, maybe not. Yes, a growth slowdown is very possible. Even those holding a neutral view on the stock (like analysts at Wedbush) concede this fact.
Still, even if growth slows down, after last year’s re-acceleration, as analysts at UBS argued last October, Chipotle’s management has set the bar low with guidance. That may make it fairly easy for results to come in ahead of expectations. Hence, a slowdown in sales and/or earnings growth may not matter much.
Add in the potential for lower interest rates later this year to lend further support to growth stock valuations, and there may be a path for CMG to sustain its current forward earnings multiple (50.9), and move higher in line with increased earnings.
Comparably sized restaurant chains have reached the low-growth stage, but is low-growth on the horizon for CMG? Not so fast!
As a Seeking Alpha commentator recently argued, Chipotle’s strong unit economics suggests that location growth isn’t going to slow down anytime soon.
For the profitability of existing locations, factors like cooling inflation and the company’s success using technology to minimize operating costs points to further margin improvements.
Don’t get me wrong. Buying in at a “fair” or “more than fair” price is better than getting in at today’s “priced for perfection” price levels. Yet while those not holding shares today may be better off waiting for a more opportune buying opportunity, if you currently own it, hold tight.
If you’ve been thinking about making a “big short” bet against CMG stock, heed my warnings, and focus on better bearish bets.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.