Chipotle Mexican Grill (CMG) Could Break Out Into 2021

The second pandemic wave is in full force, but Chipotle Mexican Grill, Inc. (CMG) continues to attract strong interest, with the stock getting close to a breakout. That would be quite an accomplishment at this dangerous time, when authorities are imposing new restrictions to keep hospitals from overflowing with patients. The divergence makes the fast food chain's execution even more impressive, raising the odds for impressive returns long after the virus runs its course.

The company beat third quarter top- and bottom-line estimates in October, while digital sales surged with a 202% year-over-year increase to $776 million, or 49% of total revenue. The timing couldn't be better because the chain lacks a strong drive-thru presence. Digital sales are expected to exceed $2.5 billion in 2020, more than double 2019, while strong growth should continue through 2021. Higher delivery prices are now rolling out, in an effort to offset compressed margins due to higher food costs and incremental marketing increases.

Chipotle announced its "first-ever" digital-only restaurant in November, in an effort to penetrate a number of urban areas that don't support full-blown physical operations. Chipotle Digital Kitchen customers will have to order in advance at the website or through the app, and meals will be picked up through a small service lobby that features "all the sounds, smells, and kitchen views of a traditional Chipotle restaurant."

Wall Street consensus on Chipotle stock has deteriorated in 2020 due to pandemic headwinds, with a "Moderate Buy" rating based upon 13 "Buy" and 11 "Hold" recommendations. No analysts are telling shareholders to close positions and move to the sidelines at this time. Price targets currently range from a low of $1,100 to a Street-high $1,745, while the stock is set to open Wednesday's session about $38 below the median $1,401 target.

Chipotle Weekly Chart (2012 – 2020)

A three-year uptrend ended abruptly in 2015 after reports that customers were getting sick and winding up in the hospital. Management made the ensuring scandal worse through denial, triggering a brutal downtrend that continued into February 2018's five-year low at $247.51. The subsequent uptick completed a cup and handle basing pattern in the first quarter of 2019, yielding a rally that attracted strong buying interest into a July breakout to new highs.

The rally wave stalled in February 2020, giving way to a vertical descent that failed the breakout. However, the stock recovered at the same trajectory as the prior downdraft, returning to the prior high in May and breaking out once again. It added nearly 450 points into September's all-time high at $1,384 and eased into a trading range that has drawn the outline of a rectangle pattern, with support around $1,175.

The stock bounced at support in early November and is now trading within 25 points of resistance, suggesting that it's getting ready to break out. However, accumulation readings haven't kept up with bullish price action and will set off a bearish divergence when price lifts above $1,400. While that conflict could generate whipsaws or even a short-term failure, plenty of buyers should come to the rescue at lower prices.

The Bottom Line

Chipotle stock is testing September's all-time high, setting the stage for a potential breakout and rally above $1,500.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.