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Chipotle's (CMG) Low Price Makes Value Investors Salivate |
Published:
August 25, 2008
The market is in turmoil, inflation is rising, the economy is
teetering on the edge of recession, and investors are in full
panic mode.
That's soothing music to a value investor's ears.
After all, we're the bargain hunters of the investment world.
And when the market is booming and nobody wants to part with
their stocks, our job can be tough. But when bearish sentiment
reaches a crescendo and investors can't exit their positions
fast enough, shopping is good.
These rare buying opportunities only come around
once or twice a decade.
The last time the entire market traded at such drastically
marked-down prices was in 2002, when downtrodden investors were
willing to sell companies like Research In Motion
(Nasdaq: RIMM) for a split-adjusted $5 per share, or Apple
(Nasdaq: AAPL) for just $12 a share. Forward-looking
investors who took advantage of the rampant pessimism have since
been rewarded with massive gains of more than +1,000% on each.
And those are hardly isolated examples.
Let's Hear Some Applause for the Bear
No one likes to see daily bloodletting in the market.
But they're necessary: In a perfectly efficient market, we could never
buy a stock at a discount -- or sell one at a premium. Every
security would be perfectly priced, all the time.
Given the state of the market, I've been on the lookout for stocks that have been dumped in the
50%-off bucket. Price wasn't the only consideration; some stocks that
have been cut in half may be facing serious issues and may now
be trading about where they should be.
Instead of beaten up banks facing deteriorating loan portfolios
or unproven small-caps with hefty losses, I focused my search on
established, profitable companies with identifiable competitive
advantages. And I zeroed in on unfairly punished companies whose
long-term fundamental outlooks are the same today as they were
12 months ago before the market began its downward slide.
I
think Chipotle is about the tastiest pick here. From
the day the burrito maker was spun off from McDonald's, the
company has been a favorite in the fast-casual dining
segment. The stock hit the market at about $45 a share in
January 2006, and within two years had ascended to the dizzying
height of $155.
But like many highfliers before it, the stock couldn't sustain
that lofty valuation and fell back to Earth once investors realized they had gotten carried away. The gains
evaporated; today the
shares are back trading in the upper $60s and are looking quite palatable
for value investors.
Chipotle lies somewhere between fast-food and casual
dining. Patrons begin lining up at the door and then wait as
their tacos, burritos and salads are prepared before them
assembly-style using fresh ingredients. Chipotle offers the speed, convenience and
pricing of a fast-food outlet, but the quality and ambience of a
sit-down restaurant -- you won't find cilantro-lime rice and
shredded beef with cumin, cloves and garlic just anywhere.
That rare combination has kept customers piling in even
under these extraordinarily challenging conditions. While most
rivals are struggling to tread water, Chipotle has posted a
sizeable +8.5% gain in same-store sales so far this year and a
+27% bump in both overall revenues and profits.
Nevertheless, with comps having grown at a torrid double-digit
pace for more than a decade, investors have reacted harshly to
signs of deceleration. Rising costs for things like cheese and
guacamole have also become a concern.
Still, the company's ability to navigate this tough climate is
impressive and bodes well for a time when consumers begin eating
out more -- and rest assured that time will come. Plus, the
Chipotle concept is still catching on around the country. In
fact, management is planning to add as many as 140 new locations
this year and deliver healthy +25% annual earnings growth for
years to come.
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Nathan Slaughter
Editor
Half-Priced Stocks, The ETF Authority
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