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Chipotle Again Makes Diners (and Investors) Sick to Their Stomachs

By John Persinos on July 21, 2017

The investment world is rife with tales of highly popular stocks that stumble and never regain their footing. Problem is, investors holding shares often delude themselves into thinking that a comeback is just around the corner, even when the stock is doomed.

That’s why I take a page from the wisdom of Gordon Gekko, the villain you love to hate in the 1987 movie Wall Street. The fictional financier, played by Michael Douglas (who won an Oscar for his portrayal), is a ruthless character who actually utters some worthwhile investing advice. Here’s a line of Gekko dialogue that currently applies to Chipotle Mexican Grill (NYSE: CMG), the restaurant chain embroiled this week in a food poisoning outbreak:

“Don’t get emotional about a stock, it clouds your judgment.” 

Below, I explain why investors still clinging to hope that Chipotle will quickly recover from its latest woes should dump (or short) the stock.

A side order of Escherichia Coli…

Grim history repeated itself on Monday, when at least 100 diners reported that they’d fallen seriously ill after eating at Chipotle Mexican Grill, the “fast casual” burrito joint beloved by Millennials. An erstwhile high-flier, the stock still gets a lot of fawning coverage on cable news.

Wall Street’s verdict was swift and harsh: the stock on Tuesday closed down 6%, wiping out gains for the year. Shares remain under pressure this week. On Wednesday, Wells Fargo Securities and BMO Capital Markets downgraded the stock from a “buy” to a “hold.”

The incident occurred at a single restaurant in Sterling, Virginia, and for Chipotle investors, it brought back a lot of bad memories about an E-coli outbreak in 2015. Chipotle immediately shuttered the restaurant after the latest sicknesses were reported. The outlet was re-opened on Wednesday, but the damage is done.

Local health authorities say the likely culprit is norovirus, which causes inflammation of the stomach or intestines or both. Symptoms include diarrhea, vomiting, nausea, stomach pain, body aches, fever, and headache. We’ve heard the words “norovirus” and “Chipotle” mentioned in the same breath before.

In late 2015, a rapid succession of food poisoning outbreaks sent Chipotle sales, stock price and affected diners right into the toilet. E-coli contamination captured most of the headlines, but norovirus also sickened more than 140 students at a Chipotle eatery near Boston College.

In a bid to recover from those previous incidents, Chipotle has been offering discounted specials and additional menu items. As sales and earnings rebounded in recent quarters, the chain appeared to be on the comeback trail.

This summer, to promote its new preservative-free “wrappers,” Chipotle is advertising the product with a cartoon rapper (get it?) who rhymes in a minute-long music video about the company’s elimination of added colors, flavors and preservatives. However, memories of public health scares tend to linger a long time and this time around, it will take more than new desserts and a cartoon rapper to erase them.

Founded in 1993, the Denver-based purveyor of burritos operates 2,198 locations in the U.S. and 29 internationally. Leading up to this week’s incidents, many analysts were arguing that the restaurant chain was recovering from its past difficulties. Popular with consumers who shun fancy sit-down restaurants but want something more than the usual burgers-and-fries, fast casuals are driving growth in the restaurant segment.

After continual hype from the financial press, Chipotle is a core holding in many portfolios — and now many of those investors are getting heartburn (yet again). Their steadfast devotion to the stock is wishful thinking.

Value play? Don’t bite…

Now that shares are on a downward slope again, it begs the question: is Chipotle Mexican Grill a buying opportunity or a value trap? I think the latter.

To buttress my point, let’s turn to the words of Starbucks’ (NSDQ: SBUX) former Chairman and CEO Howard Schultz, who once said: “Authentic brands don’t emerge from marketing cubicles or advertising agencies. They emanate from everything the company does.”

And therein lies Chipotle’s dilemma. The company consistently markets itself as a fast casual restaurant chain with a healthy difference. As opposed to conventional fast food eateries, Chipotle has adopted a hipper-than-thou stance, touting its “responsibly raised” meat and simple, unprocessed ingredients with no genetically modified organisms. You don’t have to be a Madison Avenue genius to see that E-coli and norovirus are at odds with that marketing theme. Most disheartening of all, management seems to have learned nothing from 2015 and hasn’t gotten in front of the latest bad publicity.

First came the reported outbreaks two years ago. And now this week, as baseball great Yogi Berra would say: “It’s déjà vu all over again.”

Ignore the bullish analysts who are trying to tempt you into seeing under-appreciated value in this stock; its beating is well deserved. Sometimes it pays to be a contrarian, but other times, bad news is just… well, bad news. There are better places to put your money.

If you’re looking for a safer fast-casual restaurant stock, consider Massachusetts-based Dunkin Donuts Group (NSDQ: DNKN), which can be counted on to make the most of Chipotle’s latest struggles and steal market share. In the fiercely competitive fast casual business, it’s dog eat dog (so to speak).

For more on Dunkin Donuts Group, see my March 3 issue: For The Tastiest Restaurant Profits, Look to Bah-ston.

Want straight answers to your investment questions? I’m easy to reach. Drop me a line at mailbag@investingdaily.com. Or you can leave a comment at the bottom of this article in the Stock Talk section. — John Persinos

The new gold rush…

As stocks like Chipotle waver, one investment can be counted on to continue rising this year: gold.

It’s not just Chipotle — the markets have been through a crazy year. No wonder investors are flocking to safe havens such as gold.

As this aging bull market staggers through its eighth year, investors will likely experience at least moderate corrections in the global equity markets in the coming months.

Whenever emotions are strong in global markets, investors turn to gold not only to profit but also as a hedge. Rising geopolitical risks, the threat of inflation, tumultuous politics in America — it adds up to ripe conditions for a spike in gold prices. But the question is, which gold investments are best?

We reveal gold trades that could turn a small $5,000 investment into a $105,000 windfall. Click here now for all the details.

 


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Here’s What’s Really Going to Crush the Market

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