Chipotle Mexican Grill, Inc. (NYSE:CMG) screwed up, and it screwed up bad. We’re talking “getting caught cheating on your girlfriend for the second time” bad — you have no reasonable expectation of forgiveness, you just have to wait and see, if you even care about hanging around anymore at all. And CMG stock is rightfully paying a dear price.
Source: Mike Mozart Via Flickr
Chipotle shares are now down more than 10% since Tuesday following a pair of reports that put its year-plus retribution attempts into question.
CMG — which already was flailing in the wake of a disappointing full-year outlook issued in late June — has fully given back all of its rebound gains since bottoming out in the wake of the big E. coli scare in 2015 that helped spark its biggest selloff.
At the moment, shares now sit at lows last seen in 2013.
How Chipotle’s Snowball Started Rolling
The damage started on Tuesday after several news outlets reported that numerous customers had complained about getting sick at a Chipotle location in Sterling, Virginia. The illness, which later was confirmed as a norovirus outbreak, sparked immediate intraday selling in CMG stock.
Chipotle’s trust was already thin following the wide outbreak of E. coli in October, but also another E. coli batch in July, as well as norovirus and salmonella outbreaks in the latter half of the year — but was put further into doubt amid a much different health concern.
Over the next couple days, reports began to surface about rodents being seen at one of Chipotle’s Dallas-area locations, with diners later producing video of rodents crawling on the floors and walls.
While Chipotle said this was “an extremely isolated and rare incident,” continued selling through the end of the week indicates that investors feel otherwise.
But the question now becomes one of whether you can ever go long CMG stock again with any confidence. The tired ol’ adage “Buy when there’s blood in the streets” immediately comes to mind, but when it’s a river of plasma … it’s probably worth at least waiting a little bit.
Still, there are a few reasons to at least consider buying Chipotle … at some point, if not now.
The first actually came more than half a year back, when Chipotle ditched is co-CEO structure and Bill Ackman was able to push new directors — thick with restaurant experience — on the board. The argument then was these directors would help push innovation and ensure that the company toed a healthier line. While that latter argument is chipped, it’s not broken; I want to give this team time to see how they react to Chipotle’s first major crisis under their watch.
One problem: Chipotle’s insistence on using the freshest, most all-natural ingredients involves a more complicated supply chain than many other restaurants, and is partly why food sickness might always be an issue.
“(Chipotle’s) food sourcing is a laudable effort—and it’s what customers want. But they’re probably walking a fine line between offering fresh, local ingredients and decentralized food preparation and the risk of introducing foodborne pathogens because it is such a complicated food chain,” Melinda Wilkins, director of the online master of science in food safety at Michigan State University, told Wired last year.
However, while it’s doubtful the chain will ever look as simple as, say, McDonald’s Corporation (NYSE:MCD), the board has been working on solving this complexity. Now, investors need to watch to see how management responds on this front.
Willingness to Expand
Chipotle features one of the most limited menus in the fast-food world, setting up its buffett line to pump out a couple of products customizable with just a handful of veggies, meats and cheese. That’s why investors should take heart at the company’s willingness (under Ackman’s new board members) to branch out to new areas.
Last year, Chipotle debuted chorizo — its first menu change since 2014, when the company rolled out tofu sofritas. And this summer, the reports that the company would add queso to the menu added a dollop of optimism from the analyst camp.
Said Maxim Group’s Stephen Anderson earlier this week:
“We believe CMG’s queso is differentiated enough to be not only a potential traffic driver in its own right, but also take market share from immediate rivals, including Qdoba.”
This only can drive customers if they’re willing to forgive Chipotle. While that seems like a tall order just days removed from two more flare-ups, remember: CMG has had numerous food-safety issues throughout its history, and even after the 2015 E. coli breakout, eventually, some customers did return.
A Quick Bounce in CMG Stock?
Reality check: While Chipotle is wounded, this isn’t a bankruptcy concern, and there’s no imminent collapse of the business. This week’s events were bad, not fatal.
With that in mind, let’s look at the chart.
Chipotle’s Relative Strength Index (RSI) indicator is at its lowest readings since early 2016, when the dip in CMG stock was reaching its end. Sellers eventually became exhausted, and what followed was an oversold bounce of roughly 25%.
That’s not an argument for a long-term buy here, but there’s a powerful case for trading bullish options for a quick profit. CMG stock hasn’t managed to go any higher than it did after this technical bounce — and that’s despite a couple quarters’ worth of earnings reports that showed a clear signs of fundamental improvement.
And what about buy-and-hold investors?
Chipotle has broken trust for the umpteenth time, and more food sickness outbreaks are simply going to happen, if not tomorrow, then next month, or next year. That’s the risk Chipotle takes for the experience it’s trying to deliver to its customers.
The first step comes after the bell Tuesday, July 25, when Chipotle reports its quarterly earnings, when we get both an idea of where the restaurant was before this flare-up, and potentially some guidance for the current quarter, which likely will be affected by this week’s events. If we don’t receive any guidance, then it’s a waiting game of absorbing industry reports and any tidbits that CMG decides to dole out over the next three months until its Q3 report — when we’re certain to find out just how bad the damage was.
In short, CMG stock isn’t a safe long-term play for at least another few months. But if you’re aggressive and quick on the trading front, you might be able to squeeze out some profits on the long side.
Kyle Woodley is the Managing Editor of InvestorPlace.com. As of this writing, he was long CMG and considering adding to his position in the next 48 hours. Follow him on Twitter at @KyleWoodley.
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