A gain of 16.04% in 2019 for shares of Chipotle Mexican Grill, Inc. (CMG) tells a story of a stock gaining alongside a high amount of unusual trading activity. In this case, it's bullish activity because the shares are heading higher on increasing volumes, indicating that a buyer is involved.

Over time, we've learned how stocks with a history or strong fundamentals tend to rise in price. Smart money managers are always looking to bet on the next outlier stocks ... the best in class. The main criteria we look for when betting on upside in a stock bouncing after a period of pressure are a history of strong fundamentals, oversold conditions and a slowing of big selling in the shares.

I'll go into the fundamental picture later, but the true tell on the near-term trajectory of the stock lies in its trading activity. Simply put, it's all about supply and demand. When demand is higher than supply, the stock rises. When demand is lower than supply, stocks fall. For most of 2018, Chipotle was a stock blasting higher seemingly daily. Beginning last September, the stock got caught up in the massive wave of selling that crushed the market. In our view, pullbacks = opportunity, especially a pullback we see as mechanical in nature.

For Mapsignals, when we look for an entry on a leading stock, we want to see an increase of potential buying. Just to show you graphically what our unusual trading activity signal looks like, have a look at all of the unusual institutional (UI) signals Chipotle stock has made over the past year. Up until August 2018, you can see a lot of buy signals, which coincide with a lift in the shares. Then, beginning in October, it has been a one-way train of selling alongside a fall in the shares, which has reversed in January. This is notable because stocks move based on supply and demand. Clearly, demand is outstripping supply lately:

Chart showing the unusual institutional (UI) signals made by Chipotle Mexican Grill, Inc. (CMG)

So far in January, Chipotle stock has logged three unusually high-volume days, indicative of buying in the shares (see the chart above). However, what gets our attention now is that Chipotle is gaining quietly but in an unusual way, which suggests that demand for the stock is increasing. If you are going to make a bet on the direction of the stock, it is prudent to pay attention to how the shares are trading. Just like you don't want to fight the trend, you also do not want to fight a stock that shows increasing price alongside an increase in the volume traded. Someone could potentially be accumulating a position.

Mapsignals' goal is to identify tomorrow's top stocks today. We're basically looking for outlier companies with healthy fundamentals accompanied by outsized unusual institutional trading activity. By studying these data points, we can make an educated guess as to which equities institutions are trafficking in and marry this information with fundamentally sound companies. We want the odds on our side when looking for the highest-quality stocks.

When we decide on a strong candidate, we consider prior leaders that have a history of technical outperformance. When they show leadership, we see these as opportunities. Below are a few areas in which Chipotle shares are grabbing our attention:

  • One-year outperformance vs. market: +61.36% vs. SPDR S&P 500 ETF (SPY)
  • One-year outperformance vs. sector: +55.31% vs. Consumer Discretionary Select Sector SPDR ETF (XLY)
  • Recent bullish unusual trading signals

Now, we take it a step further and score the best stocks showing unusual trading activity. Below you can see the historical times since 2018 when Chipotle stock made buy signals for Mapsignals. These are the highest-rated signals in our stock universe. Clearly, we have been all over the massive run-up over the past year. We'd even venture to call this stock an outlier:

Chart showing the unusual institutional (UI) signals made by Chipotle Mexican Grill, Inc. (CMG)

On top of a technical picture that is strong, one should also look under the hood to see if the fundamental picture supports a long-term investment. As you can see, Chipotle's latest earnings report showed solid growth:

  • Q3 2018 year-over-year revenue growth rate: +8.6%
  • Q3 2018 year-over-year adjusted net income growth rate: +60.3%

Chipotle stock is breaking out to highs and has a history of great fundamentals. We believe that the current level for the shares is in position for further upside. The narrative for Chipotle and fast casual diners is one of a growing business model. I am always on the lookout for great companies showing usual trading activity in the shares. The best companies tend to trend higher over the long run. All of this points to a long-term opportunity for the stock.

The Bottom Line

Chipotle stock represents a potential buying opportunity for the long-term investor. Given the lift in price, historical fundamental outperformance and recent unusual accumulation signals, this stock could be worth a spot in a growth-oriented portfolio.

Disclosure: The author holds a long position in Chipotle shares at the time of publication.