Over the weekend Barron’s painted a fairly downbeat picture for Chipotle’s (CMG) prospects in the coming year as growth decelerates, suggesting that “the stock could lose another 15% to 20%” in their feature article Chipotle Losing Its Spice. The piece sites increasing competition from some now well funded recent ipos (SHAK) in the quick serve space, rising food costs and of course valuation.
To be honest I don’t see anything new here, despite this being a stock that I have not been a fan of for a while (and been wrong). A few things that stick out to me now are generally related to the stock’s reaction to news and waning momentum. Most notably the stock’s 17% decline from the all time highs made in January, the two consecutive 7% gaps lower on massive volume following disappointing earnings in February and April and the stock now sitting important one year technical support:
I would also add that the stock recently broke the uptrend that has been in place since late 2012, with little technical support to $500:[caption id="attachment_55058" align="aligncenter" width="600"] CMG 3yr chart from Bloomberg[/caption]
During the stock’s bull run from late 2012 to its highs earlier this year it gained more than 200%, and for the most part disregarded any bad news. Well that has apparently changed.
The next identifiable catalyst is earnings, confirmed for July 21st after the close. The options market is implying about a 7.5% move between now and Friday July 24th. If you thought the stock could have another 7% move, then picking a direction is even cheaper than buying the move. Short dated options prices are elevated despite the stock’s lack of recent movement, with 30 day at the money implied vol at 35%:[caption id="attachment_55059" align="aligncenter" width="600"] CMG 1yr chart of 30 day at the money IV from Bloomberg[/caption]
A bounce back to the late June high near $625 could provide a short entry prior to earnings, but it is also important to note that in 2013 and 2014 the stock had 4 post earnings moves of greater than 10%, so it likely makes sense to define risk, despite elevated options premiums:[caption id="attachment_55060" align="aligncenter" width="600"] From Bloomberg[/caption]
Gun to my head right here with stock $605 I’d prob buy the July 24th 600/550 put spread for $15 to play for a break of $600, but it kind of feels like a press on the short side and makes sense to wait for a bounce if you agree with Barron’s and think that Q2 earnings will be the catalyst.