Wednesday, February 8, 2012

CMG: A high price for tasty goodness

Chipotle Mexican Grill Inc. (CMG) -- well, everyone knows Chipotle, the mix-and-match design-it-yourself Mexican food place with high-quality ingredients.

CMG's stock has been rolling upward at an incredible pace since its recession low of $46.88 in early February 2009. The most recent leg up began at $321.47 on Dec. 20, 2011 and has continued up to a higher high of $375.25 set today.

Like most stocks these days, CMG's volume has declined this year compared to the end of 2011. But, it's a wonderful bullish chart that confidently shouts, "Buy me!"

The Denver, Colorado company, which does business nationally and, to a limited extend, abroad, had the most bullish chart among 16 large-cap stocks selected at random. (See my essay "10,000 Charts" for a description of my screening method.)

The company's financials buttress the bullish view. Return on equity is 23% and the company carries no long-term debt. That makes it a growth stock under my rules. Institutions own 99% of the stock.

The analyst consensus is that CMG is a buy.

Of course, there is a price to pay for tasty goodness. The price/sales ratio is sky high. It takes $5.16 in stock to gain control of a dollar in sales.

CMG's biggest drawback is the price. At nearly $380 a share, there is just not enough granularity there for proper position sizing.

The stock has a full selection of options with excellent bid-ask spreads, better than I would expect for a stock with average volume of only 604,000 shares. Implied volatility is way low, at 26%, and has been stalling sideways the past four days.

The volatility steers me toward an outright long position rather than a vertical spread. I would buy call options as my trading vehicle.

Next earnings are scheduled for April 20.

Decision for my account: A wonderful stock, but I don't like the high price, both in terms of sales (the same ratio as Google) and in absolute terms (high prices are awkward for position sizing). Also, the super-low implied volatility bothers me -- 26% is just 8 points above the S&P 500's volatility, supernaturally low for an individual stock. Those are pretty arcane reasons for rejecting a trade, but there you go. Sometimes it's the small things count.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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