Following Chipotle’s (CMG) Q3 results on October 20th, the stock did the unthinkable, it sold off. The stock’s one day decline the next day was the result of management’s forward guidance that same store sales of stores open at least 13 months will rise in 2015 in the low to mid single digits vs analysts prior estimates of 7.2%.
What’s interesting about the market reaction is that most investors deemed the guidance to be overly conservative, as the stock really only suffered one big down day, and has since filled in most of the earnings gap:
From purely a technical standpoint, the stock seems to have found some resistance right near the gap fill, which also corresponds to the breakout level from July, and the stock’s now declining 50 day moving avg (purple). On the flipside, the stock seems to have some decent support near $600 which also corresponds to the breakout level from July, but also just above the stock’s rising 200 day moving average (yellow).
So while the stock has seem to find its range, the options market is suggesting a a fair bit of calm. At the money 30 day implied vol is now back towards the 52 week lows:
The main bear case for CMG has been that its a burrito company selling at 50x trailing earnings. And while it seems egregious, trying to short the stock solely on valuation concerns has been a fools errand for years. So is the company’s acknowledgment that same store sales growth in 2015 is slowing the cue to get in on the short side, or take profits on longs?? Well it could be, if the company reports a disappointing Q4 in January, but I suspect it will be lights out on a miss and a guide down.
I would add though, that earnings and sales deceleration and re-acceleration has been a fixture of this high growth story for the last few years. For instance, here is a look at the EPS growth year over year in CMG from 2010 to expected next year (from Bloomberg):
And looking at sales growth/deceleration over the same period:
What’s clear from above is that the stock has weathered some ups and downs with its earnings and sales growth rates over the past four years, while rallying 650% since the start of 2010. But there is one period worth noting, from the then highs in April of 2012, to the then lows of Oct 2012, CMG shares nearly declined 50% peak to trough:
This was in anticipation of lower growth rates for both earnings an sales in the out year as earnings growth would decline 2012 to 2013 from 29% to 20% and sales from 20% to 18% (its lowest sales growth rate since 2009).
So whats the trade?
Well for now, why would anyone ever short a stock in this market? So we will refrain from trying as we can’t put our finger on any near term catalysts until the company’s next earnings report which should come in late January, but likely after January expiration. Prior to the holidays we could be interested in selling some short dated premium to finance the purchase of longer dated puts for such an event, but in the meantime I suspect that the stock is rangebound between $610 and $680 (the range over the last 6 weeks). In the money call flies could be a way to play this (like the December 600/650/700) but with implied vol so low the premium at risk would not be inconsequential.