New Trade $CMG: Still An Enigma Wrapped In A Tortilla

by Dan December 10, 2013 3:08 pm • Commentary

Back in Oct when CMG was a tad lower than current levels, we took a shot playing for a reversal at a time when high valuation momentum names appeared to have hit the skids (here).  We kept the trade on a tight leash as the we bought puts outright and were looking to spread by selling lower strike puts on a pullback… well, the pullback never came and we closed the position for a loss.

Since late Oct, the stock made new all time highs, but has since lost some momentum and is sitting on near term support at $522.

CMG 1 month chart from Bloomberg
CMG 1 month chart from Bloomberg

Today’s 3% plus break lower in SBUX is a reminder that whats goes up, and what is very well loved can also come down. I wrote about SBUX’s technical set up earlier in the Chart of the Day post (Chart of the Day – $SBUX: Tall Drip) and my conclusion was that I would be inclined to buy SBUX down near longer term support, as it is my belief that investors will defend this position given expectations for growth overseas, which they are willing to assign a higher multiple too.

IN CMG’s case, there is no overseas growth story as they get 100% of their sales in the U.S.  The stock trades at 40x next years expected earnings that are expected to grow at 24%.   Much like SBUX coming into today, the stock is priced for perfection, and the slightest hint of slowing growth could cause a material re-rating of the stock.  

CMG is pretty much on our “banned list” of stocks to trade, largely due to our lack of success trading it, but every time I take a little bite of the burrito, I looked to do so with a better trade, offering a more attractive risk/reward.

[caption id="attachment_33565" align="aligncenter" width="589"]CMG 1yr chart from Bloomberg CMG 1yr chart from Bloomberg[/caption]


The year to date charts tells a pretty obvious story, the stock has been a monster up 75%, with a series of consolidation and then breakouts on big volume.

The trade that I am going to lay out is focused on the latest leg of the rally, the consolidation in the summer just above $400, the breakout above $450 in Oct on massive volume above $500 in a straight line.

My trade is targeting a breakdown below $500, but not yet, it will likely take a catalyst like and earnings miss or guide down which I would be surprised to get prior to Jan expiration.

TRADE:  CMG ($522.50) Bought Jan / March 500 Put Calendar for 15.00*

-Sold 1 Jan 500 Put  at 7.00

-Bought 1 Mar 500 Put for 22.00

*bid ask is very wide, I always use limit orders in high priced stocks like CMG, especially on spreads.

Break-Even on Jan Expiration:

Profits are maximized at $500 on Jan expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.

-Maximum risk is 15.00

Trade Rationale:

I would like the stock to continue to under-perform the broad market and drift towards $500, a level that should serve as decent near term support.  If we get to Jan expiration and the short leg expires worthless I will once again look to turn into a calendar or spread into a vertical by selling a lower put in March, further reducing my cost basis.