Thursday
StocksChipotle vs McDonalds vs Amazon vs Apple vs Google
As we lightened our shorts on Amazon (down to 1/4 of shorts) we are slowly building up our short position in Chipotle. Read their latest quarterly report in the plane last week and am convinced the higher it goes the greater the opportunity is. As always, risk management is key as the top is never easy to pick. I recall our first post on shorting Amazon at ~$145, then $180, then $220. Boy were we “wrong” with timing, but over the last 6 months Amazon has dropped by over 30%. As usual, the blogs are now bearish on Amazon. We were also trying to short Netflix along its way up (unfortunately our broker had borrowing restrictions against short selling hence we were unable to open any shorts) as sentiment was invincibly bullish. As it fell to $67 (80% discount) we became buyers in this fantastic business, whilst the blogs were full of bearish analysis citing how bad management is. My only criticism with management’s decisions were NOT with trying to separate the DVD and streaming business, but the fact that they were doing buy backs at such inflated prices! (and now requiring to raise capital). Thats just stupid capital management. Even financial illiterate doctors such as ourselves can manage that better.
Back to Chipotle. As you know, fundamentals aside, the laws of gravity and mean reversion always applies to finance. No matter how great and bad your business is, charts do not usually go up or down in a straight line. Chipotle’s rocketing share price over the last 5 years have made it TOO EASY for the dumb money to get rich. And you bet there are alot of “dumb money” (now smart) riding it. As a rule, making money is never easy.
If one were to invest 10k in Chipotle
1. 1 YEAR AGO - Total value now = $16,000
2. 2 YEARS AGO - Total value now = $30,000
3. 5 YEARS AGO - Total value now = $52,000
4. 7 YEARS AGO - Total value now = $71,000
Looking at all the charts above:
1. Chipotle outperforms McDonalds, Apple, Google, Amazon at 1, 2, 5, 6 year time frames.
2. 6 Year chart - Even with Apple’s revolutionary technology, Chipotles business/share price have outperformed AAPL significantly. If Chipotle were to pull back to the 500% mark (=Apple), that would be a share price of $250.
3. We will never be able to pick the top. We are still expecting a blow off top - hence are holding back on shorting the farm. Technically, the RSI pattern is looking good for shorting.
GOLDMAN “BUY” on CHIPOTLE : A SELL SIGNAL?
Is Goldmans recent BUY recommendation on Chipotle a sell signal? I must confess that when Goldman issued a buy on Amazon at around $180 with a price target of $230, I took that as a short signal and shorted more. They were spot on with their call as Amazon topped at $240. Goldman’s current target for Chipotle is $410 - in line with my “short the farm” target of $400. I will be saving my bullets and make provisions for $400. We are still holding our Jefferies, Netflix, Wells Fargo long as hedges in our portfolio.
Goldman Sachs analysts are bullish on burritos and yoga apparel, adding Chipotle Mexican Grill (CMG 0.00%) and Lululemon Athletica (LULU 0.00%) to their conviction-buy list.
Goldman analyst Michael Kelter says restaurant stocks will outperform in 2012, with quick-service restaurants (QSR) preferred over casual dining spots. He argues that lower food costs will likely lead to wider margins by the second half of the year. Kelter also argues that high-multiple growth stocks will outperform value stocks in the QSR group.
For that reason, Kelter added Chipotle Mexican Grill, a highflier with a forward price-to-earnings ratio of nearly 40, to Goldman’s prestigious conviction-buy list. Kelter expects earnings to grow by 35% to 40% this year, noting that his estimate for earnings of $9.39 a share is well ahead of the consensus estimate of $8.63 a share.
“We expect upside to both (same-store sales) and profit margins as lower food costs work their way through the P&L and fixed cost leverage continues,” Kelter writes. He also raised his price target for Chipotle by 5% to $410. Shares of Chipotle currently trade around $341 after rallying 60% over the past year.
Meanwhile, Kelter also recommends McDonald’s (MCD 0.00%), Darden Restaurants (DRI 0.00%) and Tim Hortons (THI 0.00%) as other favorite long ideas in the sector for 2012, while he would sell Cheesecake Factory(CAKE 0.00%), Yum Brands (YUM 0.00%) and Wendy’s (WEN 0.00%). He rates Dunkin Brands (DNKN 0.00%) as “neutral.”
CONCLUSION:
1. Hold small core short in Chipotle (20%)
2. Next target to short more at $410. (50%)
Post Tags: Amazon, Chipotle, McDonalds
Related Posts
Related Post
Popular
- The Inflationist Challenge 2009 (35)
- Stock Portfolio Management (15)
- Using Fibonacci Numbers in Trading to Predict the Market (12)
- Phosphate Rock, Phosphate Companies - Investing in Agriculture (9)
- Comparison of Bear Markets: 1929 vs 1937 vs 1976 vs 1987 vs 2000 vs Current Bear Market Charts (7)
