A Pullback By This ‘Cult Stock’ Signals ‘Buy’

Chipotle Mexican Grill (NYSE: CMG), the famed operator of quick-service Mexican restaurants, soared to a new high on Friday after reporting fourth-quarter results. 

#-ad_banner-#Earnings of $2.53 a share were up 30% year over year, matching analysts’ estimates. And the company handsomely beat on the top line, reporting a 21% year-over-year revenue increase to $844.1 million.

During the conference call that followed the earnings announcement, the company discussed that an increase in prices on its menu is likely later in 2014, a direct results of higher costs for crucial inputs like beef and avocados. This is something that investors have also heard from other restaurant companies in recent weeks, and thus likely came as less of a surprise.

On the back of better-than-expected sales guidance for 2014, analysts were quick to boost their sales targets. Morgan Stanley, for example, raised its full-year same-store sales growth forecast from 5.8% to 6.9%.

Currently, Chipotle has more than 1,500 restaurants worldwide and is planning on opening up to 195 new restaurants this year. Like many companies, Chipotle also spoke favorably to the idea of increasing its stock buyback program, which speaks to the company’s confidence in the growth of its business.

In terms of price action, CMG has been nothing short of stunning over the past 15 months, with the stock price higher by almost 130%. As a result, the stock has once again gained cult status among traders and trend followers, many of which lost interest in the stock after the big correction in the middle part of 2012.

However, through the lens of a multi-year chart, the stock actually never really broke its chart, and the 2012 correction was a necessary and healthy mean-reversion move after the big run-up in the years prior.

From the 2008 lows up to the 2012 highs, CMG rallied about 1,000%. Typically, moves like this tend to end in fireworks that lead to a slope that’s too steep to sustain. The resulting correction retraced 50% of the rally, meaning CMG found support exactly at the 50% Fibonacci retracement line.

The sell-off was strong enough to shake out most of the weak hands in the stock and gave the stronger investors and trend followers an opportune moment to buy back in or add to their positions. By October of last year, CMG had exceeded its 2012 highs.

On the daily chart, as a result of the very positive fourth-quarter results, CMG rallied close to 12% on Friday, breaking past its November 2013 highs.

The newfound upside momentum looks to be strong enough to take the stock higher in coming weeks. And this week’s pullback provides a good entry point.

Action to Take –>
— Buy CMG at the market price
— Set stop-loss order at $535
— Set initial price target at $580 for a potential 7% gain in two to four weeks

This article was originally published at ProfitableTrading.com:
Cult Stock’s Breakout Signals ‘Buy’ Now




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