TRADE INSTRUCTIONS
Date: April 27, 2017
Name: Chipotle Mexican Grill
Symbol: CMG
Type: Short Sale or Long Put
Limit: N/A

Note: 3TL stand for 3-Time Loser, which means this alert if for a stock that I believe is at risk of declining in value soon so the appropriate trade would be either a short sale or a long put, but DO NOT GO LONG! And since you can play it a number of ways with put options in terms of strike prices and expiration dates I’m leaving it up to each of you to decide what, if anything, you want to do with it. For that reason, it will not be tracked in our portfolio. This trade is not a substitute for our usual buy recommendation but is simply an extra “bonus pick” for you to consider. Here’s why this stock qualifies as a 3-Time Loser according to my system.

TRADE RATIONALE
First, as is usually the case with my 3TL stocks, CMG has the lowest possible IDEAL score of 0 (on a scale of 0 – 10), meaning it appears grossly overvalued from a long-term perspective based on dividend yield, cash flow, and relative valuation.

Second, CMG has been trading far above its 50DMA for the past month and is bumping up against its upper Bollinger Band while its lower Bollinger Band just crossed above the 50DMA. That might be okay if this was a tech stock that just introduced a hot product, but we’re talking about a restaurant chain that sells burritos.

Third, the people most familiar with the company seem to have the least amount of confidence in it. Of the 34 Wall Street analysts that follow the company, only 9 of them have CMG rated as a ‘Buy’ or ‘Strong Buy’ while the other 25 have it rated as a ‘Hold’ or worse. Meanwhile, the company’s insiders sold 41% of their stock over the past six months, and its institutional holders unloaded another 576,000 shares during the last quarter.

However, the stock is up due better than expected quarterly results reported on Tuesday evening, sending its share price to its highest level in over a year. While some of that gain is clearly warranted, I don’t think a forward PER of 41 is justified given some of its other metrics.

Return on Capital is a third of what it was two years ago, and its Gross Margin is now 20% less. The CAGR (compound annual growth rate) on virtually all of its key growth metrics over the past two years is negative, although beginning to trend upward.

For that reason, I don’t think CMG is about to crash, but I do think it is overvalued and would be more fairly priced around $450. With the stock trading above $480, that equates to a decline of about 6%. Probably not worth a short given the amount of capital at risk, so using options makes more sense in this case.