When I look at the damage done yesterday in the consumer/retail sector (AMZN -4.35%, LULU -4.6%, RL & COH -6.5%, and TIF -8.24%) I am hard pressed to see how CMG which is up 50% YTD, and only less than 5% off of the all time high will be able to maintain its altitude in this sort of market environment.
Many of us have learned the hard way not to short stocks like CMG on valuation (see NFLX), and regardless of it’s ridiculous valuation, trading at 47x this years and 37x next years estimated earnings, with over 12% short interest it will take a perfect storm to send a stock like this lower……But if the SPX is going to meaningfully break below 1250 in the next couple weeks, then there will be few places to hide…..high valuation names with large short interest that have worked very well year to date may be the last men standing……but they will fall eventually (I’ll throw AAPL into this same camp too).
I don’t want to be too reactionary to this weeks downdraft and as always I want to wait for a bounce to establish a bearish position, but if you are looking to play for a near term sell off in CMG back to 300 (support) then consider buying Sept put spreads. Put Spreads in names like CMG make sense because you can define your risk.
I am going to sell the Aug 300/280 Put Spread that I bought prior to earnings (below) for 4.00 for a loss at about 1.50 and roll out to Sept.
NEW TRADE: CMG ($320.65) Buy Sept 300/280 Put Spread for 3.50
-Buy Sept 300 Put for 5.60 and
-Sell Sept 280 Put at 2.10
Break-Even On Sept Expiration:
Downside: btwn 300 and 296.50 lose up to 3.50, btwn 296.50 and 280 make up to 16.50, and Best Case scenario the stock is 280 or below (down 12.5%) and you make the full 16.50 (or 5% of the underlying).
Upside: stock 300 or higher and u lose the full 3.50 premium or only 1% of the underlying.
TRADE RATIONALE: OK this is my third go in 2 months, and while I recognize I am being stubborn, I do think if the market breaks-down through support that CMG will finally follow suit…..See my comments below from trade rationale in previous trades, they all still stand…..As always use limits in names like this as the bid ask can be wide and, wait for an opportune time to put this on if you think there is a good chance that market weakness continues through the summer into Sept and that names like CMG could be vulnerable in that sort of environment…..I chose those strikes as 3o0 and 280 look like interesting technical levels where the stock could pause. Also be meticulous about sizing in a $300 name, don’t let the leverage of options get the best of you, risk what you are willing to lose.
ORIGINAL POST July 15th, 2011:
Chipotle Mexican Grill (CMG) : Going Back to the Salsa Bar
This stock makes me ill, and I really can’t take it anymore…..some of you may think that I am just going to continue to throw away money at put premium trying to play for a sell-off……..well you are right, I am. My first attempt last month happened to coincide with the near-term bottom of the market and the stock has rallied almost 20% since that time, vastly outperforming almost any other asset in the world…..the potential for a crazy move to all time highs is the very reason why I want to use options and define my risk in names like this. [private]
With my AUG 270 / 250/ 230 Put Fly nearly worthless and earnings coming next week I want to be a little stubborn here and try to make some of my money back around the event…..
The company reports their Q2 on July 19th after the close….the options market is currently implying about a 7.5% move vs the average move over the last 4 qtrs of about 8%.
TRADE: CMG $320 Buy AUG 300 / 280 Put Spreads for ~4.10
-Buy Aug 300 Put for 6.70
-Sell Aug 280 Put at 2.60
Break-Even on Aug Expiration:
Btwn 300 and 295.90 and 300 lose up to 4.10, Worst Case above 300 lose all 4.10 premium or 1.3% of the underlying…..
Btwn 295.90 and 280 make up to 15.90 and best case stock 280 or lower make full 15.90 or about 5% of the underlying…..
TRADE RATIONALE: this is a low delta spread, meaning the options market is not placing a high probability that this spread will be in the money…..if you are interested in making this sort of bearish bet you could decide how much premium you are willing to risk and either buy a spread in greater size or just buy puts outright closer to the money…….THIS IS NOT A HIGH CONVICTION FUNDAMENTAL IDEA….BUT I WANT TO BE THERE IF AND WHEN IT EVER CRACKS, SO MORE OF A FU TRADE.
Technically the stock has made a flag at all time highs….any hiccup with earnings or guidance and this stock could easily retrace a good portion of this recent move. A re-tracement back to somewhere in-between the 50 and 100 day moving average around about 285 looks reasonable.
[caption id="attachment_3283" align="aligncenter" width="300" caption="1 Yr CMG chart Provided by Bloomberg LP"]
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ORIGINAL POST June 22nd, 2011:
Chipotle Mexican Grill (CMG $285)
This is just one of those stocks that a cynical guy like me loves to hate…..not because it’s a bad company or their products suck (I really enjoy a nice Chipotle Burrito), but because the stock is up ~700% since the bottom in 2008. [private] My generally weak short thesis clings to the fact that the stock sold off almost 75% from its then all time in late 2007 and this sort of sell off, or one much more reasonable could come this year at the faintest hint of a slowdown in sales coupled with rising input costs. A guy can hope can’t he??
[caption id="attachment_2864" align="aligncenter" width="300" caption="5 yr CMG chart Provided by"]
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A Few Little Fun Facts On The Name:
-short interest is high at almost 12% of the float.
-eps and sales are expected to grow in 2011 and 2012 at 21%/24% and 19%/16% respectively.
-stock trades at a steep valuation premium to its peers at 37X expected 2011 earnings and 42x expected 2012 earnings. MCD for comparison trades at ~16x expected 2011 earnings and sales which are only supposed to grow at about 10.5%
-Potential near term catalyst could be their July 19 earnings announcement, over the last 8 qtrs the stock has had some large moves, with the avg move of ~8%. Investors will be listening for any comments regarding comp trends as 2H 2011 will face difficult comparisons yoy.
MY QUICK TAKE: Technically, the chart looks fairly constructive near term, holding a massive up trend with a series of higher highs and higher lows over the last 12 months…….if the market can hold here, and barring any negative stock specific news, this stock will most certainly make a new all time high above 300. And with short interest above 10% for a company with a $9billion market could get a nervous short in a little bit of a predicament with the slight bit of perceived good news.
But If I am right and the market heads back to 1250 in the SPX then this is one of the last stocks on my hit list (AAPL, WYNN, AMZN, NFLX, PCLN, BIDU) to have made massive gains over the last year and not to have adequately corrected and shaken out some weak hands……if we sell off this summer then they will get to this name and will show a period of under-performance in my opinion……
2 BEARISH TRADE STRUCTURES I AM CONSIDERING: I WANT TO DEFINE MY RISK AND LOOK FOR LOW PREMIUM OUTLAYS WHILE ISOLATING JULY 19 EARNINGS AND GUIDANCE EVENT…..
CMG ($285) BUY AUG 270 / 250/ 230 Put Fly for 2.50
-Buy 1 Aug 270 Put for 10.70
-Sell 2 Aug 250 Puts at 11.00 (5.50 each)
-Buy 1 Aug 230 Put for 2.80
Break-Even on Aug Expiration:
Upside-Worst Case: stock above 270 lose 2.50 or less than 1% of the underlying….
Downside: Bwtn 270 and 267.50 lose up to 2.50
btwn 267.50 and 250 make up to 17.50
Best Case: 250 (down 12%) make 17.50
btwn 250 and 230 (down 19%) payout trails off……
Worst Case: BELOW 230 lose 2.50.
or FOR SLIGHTLY LESS PREMIUM ISOLATE A GREATER MOVE BACK TO THE 200 DAY MOVING AVERAGE OF ~240.
CMG ($285) BUY AUG 260 / 240/ 220 Put Fly for 2.00
-Buy 1 Aug 260 Put for 7.80
-Sell 2 Aug 240 Puts at 7.80 (3.90 each)
-Buy 1 Aug 220 Put for 2.00
Break-Even on Aug Expiration:
Upside-Worst Case: stock above 260 lose 2.00 or less than 1% of the underlying….
Downside: Bwtn 260 and 258 lose up to 2.00
btwn 268 and 240 make up to 18.00
Best Case: 240 (down 15.5%) make 18.00
btwn 240 and 220 (down 19%) payout trails off……
Worst Case: BELOW 220 lose 2.00