Chipotle Mexican Grill (NYSE:CMG) is known for generously sized burritos — or at least, the company used to be known for big burritos. In the world of consumer goods, perception is reality, and the public’s perception of Chipotle isn’t ideal. Investors shouldn’t be too hungry for Chipotle stock in July.
In the wake of Chipotle’s much-talked-about 50-for-1 share split, the stock may appear very cheap. Just because Chipotle shares are more affordable doesn’t mean they’re actually cheap. Knowing the difference could prevent you from taking a big bite of a stock with substantial rollover risk.
Chipotle and ‘Wildly Inconsistent’ Portions
In a previous article, I discussed Chipotle’s deteriorating reputation on social media. For years, the main reason some customers chose Chipotle over cheaper-priced Taco Bell is because Chipotle had a reputation for serving huge food portions.
However, social-media postings, including some on TikTok, suggested that Chipotle has been skimping on its portion sizes lately.
The last thing Chipotle needs now is to lose its excellent reputation among budget-conscious consumers, who are being more selective because of food-price inflation.
Wells Fargo analysts led by Zachary Fadem actually purchased and weighed 75 Chipotle burrito bowls. According to Fortune, the analysts “studied” these food items “at eight different Chipotle locations in New York City.”
Unfortunately, the Wells Fargo analysts found the burrito bowls’ weights to be “wildly inconsistent,” Fortune reported. Shockingly, the heaviest burrito bowl weighed 87% more than the lightest one.
Personally, I would be disgusted by this outcome. However, analysts tend to be polite and euphemistic in their phrasing. Thus, the Wells Fargo analysts wrote that Chipotle’s “order consistency remains an opportunity.”
I’d say it’s a problem, and it’s something that Chipotle’s management needs to take much more seriously.
Chipotle Stock Split: A ‘Sell-the-Event’ Scenario
Some investors undoubtedly assumed that Chipotle stock would soar after the company’s highly publicized share split. Yet, I warned people not to get caught up in the stock-split mania.
Chipotle’s common shares began trading on a post-split basis on June 26. That day marked a short-term price top, as the stock declined over the following two weeks.
I hate to say “I told you so,” but this turned out to be a “buy the anticipation, sell the event” scenario. Forward-looking investors bid up the Chipotle stock price before the split, not afterward.
Because of Chipotle’s elevated valuation, the share price could easily continue to decline. A Barron’s article observed that Chipotle shares are actually more expensive than Nvidia (NASDAQ:NVDA) stock, since Chipotle “trades at 70 times forward earnings.”
I prefer to use the GAAP-measured trailing 12-month price-to-earnings ratio. It’s around 67x for Chipotle and close to 73x for Nvidia. Therefore, Chipotle is certainly richly valued, albeit maybe not more so than the market darling Nvidia.
Chipotle Stock: The Rollover Risk Is Real
Hopefully, Chipotle’s management will take strong, decisive action to recover its reputation. For the time being, however, perceptions of Chipotle’s portion sizes remain an issue.
Moreover, even after a post-stock-split share-price pullback, Chipotle’s high valuation is still a cause for concern. So, Chipotle stock is susceptible to serious rollover risk in 2024’s second half, and prospective investors should seek delectable profits elsewhere.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.