Regular readers of Risk Reversal know that we are tried and true believers in technical analysis, despite rarely starting an idea with a chart, more commonly using charts as an input to an existing thesis. In many ways the chart of an underlying security can serve as a sort of beacon in uncertain times, and at the very least help inform our strike levels for options trades.
Which leads me to the current situation with Chipolte (CMG), a stock that in mid October was threatening new all time highs, but has since declined nearly 35% as multiple cases of the E.coli virus have been linked to multiple store locations in different regions of the country. After once being up nearly 11% on year at its highs in August, the stock is now down 27% in 2015:
As the story continues to evolve, the company continues to try to reassure consumers and the press that they are taking extraordinary measures to contain the problem and refocus their food preparation processes, but the hits keep coming. The range of potential outcomes are impossible to quantify, and Wall Street analysts keep slashing their sales and earnings estimates. Even with the stock’s 35% decline from its highs, the stock still trades at 30x expected 2016 earnings that analysts now see growing at only 7%, its lowest earnings growth since 2007.
No matter how much you like this company, its product and or its management, given the stock’s quick decline, you have to weigh the potential for the news flow to turn quickly and the stock’s potential to reverse vs the continued uncertainty. No one knows how and when this is going to shakeout, but one thing is for sure, the bloom is off the rose, and it may take years for the company to gain back the trust of consumers, and shareholders.
I have nothing to add as far as how and when this stock’s stops going down, but a look at the five year chart may offer some levels of support/resistance that could be worth trading against depending on one’s directional inclination.
CMG’s earnings gap on October 20th of 5.5% was significant as it placed the stock below the uptrend that had been in place for most of the stock’s run from late 2012:
The stock paused at $600 after the first round of e.coli news, and then now kind of pausing at $500, which is important support going back to late 2013. The next real support level is down at $470, the 2014 low, and then about $440 which was the level the stock gapped from in Oct 2013 to make what was then a new all time high. $600 will be important resistance on the upside, as will $700 as it also corresponds with the large volume gap level and the break of the uptrend.
The point here is simple, the fundamentals are in a fairly rare situation, they are un-quantifiable, which really only leaves us with sentiment and technicals. I suspect both have more to go on the downside, as there are few obvious quick fixes.