Chart of the Day – $CMG: Burrito Loco

by Dan February 3, 2015 11:25 am • Chart of the Day• Commentary

Chipolte (CMG) reports their Q4 results tonight after the close.  The options market is implying about a 7% one day move which is shy to the 4 qtr avg of about 9% and the 8 qtr near 10%. To state the obvious, these are massive moves for a restaurant stock that has been growing earnings and sales consistently over 20% a year for the last few years.  

Earlier I got a question from a reader asking whats the short strategy into the print.  My quick response:

well I think u know where we would stand on this stock, and it is likely to be wrong. its kind of on our “banned” list. valuation makes little sense, but the re-acceleration in eps growth from 20% in 2013 to an expected 34% in 2014 is pretty impressive as sales growth accelerated from 28% to an expected 28% in 2014. If the company guides up (above consensus 24% eps growth & 18% sales growth) for 2015 then expect a massive breakout.

On the flip-side, the stock is obviously priced for perfection and a miss and guide down would likely see the stock outperform the 7% implied move to the downside. the stock has been a massive mover on earnings, about 9% avg over last 4 qtrs (2 up & 2 down) and almost 10% over 8 qtrs (6 up & only 2 down)

From a technical standpoint, the 2 year uptrend speaks for itself:

[caption id="attachment_50529" align="aligncenter" width="600"]CMG 2yr chart from Bloomberg CMG 2yr chart from Bloomberg[/caption]

On a a 1yr basis, the recent breakout to new highs was also impressive with the stock able to hold gains for all of January, while many competitors like MCD and YUM took it on the chin.  The $700 breakout level will serves as imperative near term support, with a gap below making $650 the next real support level, down about 8.5%, slightly above the implied move:

[caption id="attachment_50530" align="aligncenter" width="600"]CMG 1yr chart from Bloomberg CMG 1yr chart from Bloomberg[/caption]

Options prices are elevated as expected, but slightly below where they have been prior to results over the last year. Those long premium into the print should expect short dated implied vol to come in nearly 50% after the event:

[caption id="attachment_50531" align="aligncenter" width="600"]CMG 1yr chart of 30 day at the money Implied Vol from Bloomberg CMG 1yr chart of 30 day at the money Implied Vol from Bloomberg it.[/caption]

With such a large dollar stock, long premium trade structures look intimidating into events in stocks like CMG. One way to lessen the overall dollar risk is through flies meant to isolate either no move or to express a directional bias targeting a range where you think the stock is going. As I stated above, the stock has the potential to move, and thats not just based on its part performance, but a confirmation of the current trend likely causes another leg higher, while any hint to decelerating growth and the stock is dead.  Oh yeah, and status quo likely means the path of least resistance is higher.