Tuesday, March 22, 2016

Chipotle Mexican Grill: Profit With This Falling Knife

Welcome back, amigos!  Before I start with this installment, I'd like to share my condolences with the people of Belgium, and especially with the relatives of each victim of this horrific attack.

Okay now, have you heard of the expression, "Trying to catch a falling knife?"  It means to explain the act of making a timely stock purchase of a company whose shares have been pummeled by some unexpected event.  Imagine actually trying to catch a falling knife.  If you grab it at the wrong time, as the sharp blade is still within your grasp, you will get cut!  However, if you grab it at the handle, all will be well.

The phrase is synonymous with risk and danger.  As in...stay the hell away from trying to do this!  I am in agreement with the outstanding money manager of Oaktree Capital, Howard Marks, who believes falling knives are great opportunities for the "second-level thinking" investor.  

Chipotle Mexican Grill (CMG)--$471.76, is one stock that exemplifies opportunity in the sharpest of ways.  The once loved stock has been defecated by investors, literally.  Norovirus, E. Coli, cover-up allegations, inept handling of the situation, and on...had investors looking for the exit in droves earlier in the year, dropping the price to as low as $399 from a high of $758.  The effect?  Making the stock cheaper with a better entry point.

The contrarian in me sees Chipotle recovering from the bad publicity, loss of customers, etc.  Will it be overnight?  Of course not!  But by the time you know it, it will be too late.  You will have missed the run-up.  Investing in stocks is about doing what others aren't doing.  Chipotle will undoubtedly miss earnings and top line come April.  I think that is already factored in by investors, and if there is any upbeat reporting by its CEO, Steve Ells, the stock will rally.  By upbeat, I mean Ells saying things are better and ahead of schedule, same store sales, e.g., getting closer to pre-crisis levels.

The bear case.  The bear case for Chipotle includes geo political events that would impact the market as a whole.  A false bull, meaning we are really in bear market territory and the past month has been a typical bear market rally, i.e., we are heading for a major crash.  Litigation that could result in costly settlements.  Otherwise, Chipotle looks like a knife that has stopped falling, uncrowded, and the perfect anti-fear play.  Start a position tomorrow if you have cash...that's my take!

Thanks for reading!  See you next time.      

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