Be careful where you eat, as well as where you invest. Chipotle Mexican Grill, Inc. (CMG) plunged 44% in less than three months. The stock has bounced back approximately 15% since that time. Once American consumers feel as if they have been wronged, the majority will no longer feel loyal to that brand. It can take years for a brand to reestablish its image. Unfortunately, in the food space, it can take more than a decade. The American consumer will simply not rush back to a specific Mexican restaurant when so many similar alternatives are available.
Figuring out where a stock is likely to go over the next year isn’t as complicated as many people think. The problem for most investors, traders, analysts, and money managers is that they’re married to the numbers. The numbers are imperative, but they’re still not as important as trends. In the case of Chipotle, all you have to do is Google “Chipotle” and click on each article that comes up. After reading the articles, scroll down to the comments section. Since these are mostly going to be local publications in different areas of the country, you will find hundreds – if not thousands – of replies to the current Chipotle fiasco. Think of this as a direct link to current consumer opinions of the brand. If you read through these comments, you will find that at least 85% of these consumers – many once loyal to the brand – have no interest in returning to Chipotle at any point in the near future. It has also been reported that lines at Chipotle restaurants are much shorter than in the past.
(For more, see: Chipotle Shares hit 52-week Low on New Outbreak.)
Even if you were to say that Chipotle was going to solve the problem, it still makes a bearish case for CMG.
- DNA-based testing of fresh meat and produce.
- Improved food handling and preparation procedures.
- Enhanced food training.
The supply chain and quality control are complicated for Chipotle because it’s either a move toward lower quality or increased expenses. Since a move toward lower quality doesn’t match the company’s mission, that isn’t likely to be the route taken. Instead, Chipotle will have to spend more in order to guarantee safety to diners. At the same time, it will have to devise clever – and expensive – marketing campaigns in order to regain lost market share. And it’s going to have to be promotional. For example, some Chipotle locations are giving out free food. What does this tell you? (For more, see: Chipotle Suffers from E. Coli Scare.)
If you look at the big picture, Chipotle loses either way. If it can’t regain its once loyal customers, it loses. If Chipotle does regain its once loyal customers, it comes at a steep price. And you can’t rule out one other very real possibility, which is that Chipotle spends the money to regain its once loyal customers and fails.
Think of all the quick-service, fast-food, casual, and private Mexican restaurants in the United States right now. If more than 500 people in 13 states have suffered from E. coli, norovirus, or salmonella recently and the news has been widespread across the entire country, do you really think consumers are going to be excited about eating at Chipotle? December comps already slid 30% year over year. In 2016, you’re likely to see dismal earnings reports and guidance. It’s possible that CMG has a few short-lived rallies, but if you go long on CMG, then you’re going against the trend. (For more, see: Chipotle Execs Ease Investors' Nerves.)
The Bottom Line
It’s possible that Chipotle pulls off a miraculous recovery over the next few years. But that miraculous recovery won’t happen in 2016, which makes owning CMG dangerous. (For more, see: The Biggest Risks of Investing in Chipotle Stock.)
Dan Moskowitz does not have any positions in CMG.