Stock Pick: Chipotle Mexican Grill Inc. (CMG)

Chipotle Mexican Grill Inc. (CMG) was created out of the concept that food served fast shouldn’t have a fast-food experience. From that idea, the restaurant that specializes in serving tacos and burritos is now operating 2,424 branches in the US, in addition to the 37 restaurants in the UK, Canada, Germany, and France. As of January 2018, the company has a workforce of 68,890 employees.

Technical Analysis of Chipotle Mexican Grill Inc. (CMG)

We like CMG because it is giving us good bullish action. The stock dropped to as low as $247.52 in February 2018. At that point, CMG was down by over 67% from the all-time high of $758.61 in August 2015. The correction happened while many stocks in the S&P 500 were trending higher. This indicates that CMG may be a good counter-trend bet considering current market conditions.

After almost a 70% devaluation from the top, CMG started its reversal process. It took the stock almost a year from the bottom to regain its bullish tone. We now have an opportunity to buy shares at, what looks to be, the early stages of CMG’s bull run.  

Technical analysis shows that CMG has taken out resistance of $472. This triggered the break out from the inverse head and shoulders pattern on the weekly chart. The breakout signals the stock’s shift from accumulation to markup.

In addition, the rally above $472 has enabled CMG to move on top of the 200 moving average on the weekly chart. Also, we can see a golden cross between the 50 MA and the 100 MA. With these moves, we have a good setup where all three moving averages are acting as support levels. They will help keep CMG above support of $472.

Fundamental Analysis of Chipotle Mexican Grill Inc (CMG)

In addition to our technical analysis, fundamental analysis also backs our bullish view.

Analysts at Zacks predict that the company’s earnings over the next 5 years will grow by an average of 17.86% per year. Analysts estimate that Chipotle’s earnings per share will grow the fastest this year by 40.93% from 8.42 in December 2018 to 11.95 in December 2019.

Also, the trailing twelve months price-to-earnings ratio (PE ratio TTM) of CMG is 77.43. The stock may look extremely overvalued but it is not if you consider its five-year average of 86.02. In fact, the stock may be undervalued if you also look at the five-year maximum of 554.90. This tells us that investors are more than willing to purchase CMG shares at a premium.

The strategy is to be patient and buy on dips as close to $472 as possible. CMG is currently overbought on the daily chart plus volume has been declining since April 2018. These are signals that tell us that the stock will likely retest the $472 soon.

As long as bulls hold this level, CMG will likely generate the momentum to bounce to our target of $562. Take that out and the next target is $647.

The timeline for the target is more than six months.

Weekly CMG Chart


Monthly CMG Chart

As of this writing, the Chipotle Mexican Grill Inc stock (CMG) is trading at $521.37.

Summary of Strategy

Buy: On dips as close to $472 as possible.

Targets:  $562 and $647.

Stop: Close below $450.

 

Featured image courtesy of Shutterstock.

Kiril is a CFA Charterholder and financial professional with 5+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and funds, as he does his own crypto research and is a Product Manager at Mitre Media. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.