Chipotle’s market capitalization is above $12 billion. To put that into perspective, that’s about six times the market cap of Cracker Barrel, five times that of Wendy’s and Brinker International (known for its Chili’s and Maggiano’s chains), and about double that of Darden Restaurants (owner of such casual and upscale restaurants as Red Lobster, Olive Garden, Capital Grille, Season’s 52, and Eddie V’s Prime Seafood). The comparison between Chipotle and Darden, for instance, is revealing. Chipotle brought in less than $3 billion in revenue last year versus Darden’s more than $8.5 billion; it earned less than $300 million, while Darden’s profit exceeded $400 million; and it paid no dividends, whereas Darden paid a dividend yielding 4.4%. Sure, I can see Chipotle growing and matching Darden on these metrics, and perhaps even surpassing Darden eventually. But it will have to do all that and more to justify a market cap that is twice that of its competitor.
An unprofitable, extremely high-beta stock
MGM Resorts International (NYSE:MGM) is one of the highest-beta stocks I could find. Even though MGM grew its top line last year, it did so at the expense of its bottom line and remained unprofitable. To succeed, this company will have to dramatically reduce its expenses and increase its convention activity, which is a significant driver of its profitability. That seems unlikely to happen in either fiscal year 2013 or FY 2014. In fact, it is far more likely that MGM will remain unprofitable for the foreseeable future given weak consumer spending, intense domestic and international competition, and a sluggish economy. With a beta approaching four and a market in need of a correction, I would stay far away from this company, because even a small correction could have a large impact on MGM’s stock price.
My Foolish take
These are all intriguing companies whose valuations defy the logic of many value investors. But when boring S&P stocks are returning almost 20% year to date, investors often pour money into some of the hot stocks. Within the next few years, all of the above stocks have the potential to trade at a fraction of their current prices, especially if there is a significant correction in the market.
The article Why These Are Bubble Stocks originally appeared on Fool.com and is written by Ryan Peckyno.
Ryan Peckyno owns shares of Darden Restaurants. The Motley Fool recommends Chipotle Mexican Grill, Tesla Motors, and Zillow. The Motley Fool owns shares of Chipotle Mexican Grill, Tesla Motors, and Zillow.
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