I follow quite a lot of companies, so the usefulness of a watchlist to me cannot be overstated. Without my watchlist, I’d be unable to keep up on my favorite sectors and see what’s really moving the market. Even worse, I’d be lost when the time came to choose which stock I’m buying or shorting next.
Today is Watchlist Wednesday, so I’m discussing three companies that have crossed my radar in the past week — and at what point I may consider taking action on these calls with my own money. Keep in mind that these aren’t concrete buy or sell recommendations, nor do I guarantee I’ll take action on the companies being discussed. What I can promise is that you can follow my real-life transactions through my profile and that I, like everyone else here at The Motley Fool, will continue to hold the integrity of our disclosure policy in the highest regard.
Chipotle Mexican Grill, Inc. (NYSE:CMG)
Shares of fresh-Mex restaurant chain Chipotle have bounced well off their 52-week lows set in October due to ongoing consumer spending growth in the U.S. and the fact that food inflation has been well under control. However, I feel that may be about to change.
Historically speaking, it’s rare for food costs to stay tame for such a long period of time. Chipotle Mexican Grill, Inc. (NYSE:CMG)’s costs are already a bit higher than most chains because of its “food with integrity” promise that only uses meat from animals that weren’t treated with antibiotics. Just as you would see a premium for organic and natural products in the grocery aisle, Chipotle pays a premium cost for this higher quality meat. In addition, custom duties on chicken in general are likely to cause chicken prices to rise in the short term. That’s all bad news for Chipotle, which has been holding firm to its pricing in order to not scare customers to its competitors.
The other problem here is one based on valuation. Investors like Chipotle Mexican Grill, Inc. (NYSE:CMG) because of its socially conscious choices, but they’re completely overlooking the fact that the potential for rising costs and increased competition are gutting its growth rate. Sure, total sales increased by 13.4% in the first-quarter, but that was to be expected with the addition of 48 new stores. Comparable-store sales, a more accurate reflection of growth, rose by a mere 1%. That’s appalling considering that Chipotle Mexican Grill, Inc. (NYSE:CMG) trades at 29 times forward earnings.
I’d suggest a possible way to trade this is by looking for an appropriate short-sale entry into Chipotle and perhaps hedging it with a long opportunity in one of Chipotle’s rivals, such as Buffalo Wild Wings (NASDAQ:BWLD). BWW saw comparable-store sales expand at a slightly faster rate than Chipotle Mexican Grill, Inc. (NYSE:CMG) (1.4% for company-owned restaurants and 2.2% for franchised) while expanding its restaurants at a similar pace. Better yet, I feel BWW has more consumer appeal thanks to its catchy advertising and specials.