Chipotle: New health outbreak, new short

Chipotle Mexican Grill Inc. (CMG), the trendy Mexican-style restaurant chain founded in 1993, develops and operates more than 198 Chipotle Mexican Grill restaurants in the United States, 29 international restaurants and 23 non-Chipotle style restaurants. Denver-based CMG has become famous for its unique food services, while also becoming infamous for its candidacy as a long-term short position.

Since 2015, CMG has signaled its short-selling potential and has been continuously recommended as a short. CMG relished its notoriety and its growth rate in 2015, sending the equity to an all-time high of $758.61 with a market cap of $15.19 billion, an earnings per share of 16.76 and a P/E ratio of 29.07.

In the fall of 2015 the E. Coli outbreak at various stores in multiple locations across the United States, and the subsequent media coverage generated by the Center for Disease Control’s 2016 formal declaration of its direct association, led CMG to slash its sales and earnings forecast. This sent the stock’s price plunging from its then 52-week high of $521.52, a market cap of $12.82 billion, EPS of 0.77 and P/E ratio of 525.84, as of March 8 2017. During the same period, CMG was faced with a secondary offering of $2.9 million shares by a prominent shareholder activist, which further reducing the market’s trust in CMG.

In July 2017 it was reported and confirmed that 130 customers in Sterling, Va., were contaminated by food from a Chipotle restaurant and infected by the norovirus. CMG has been unable to distance itself from its food poisoning reputation, and solidified its June 2017 guidance warning that CMG’s operating costs would be higher, and that its promotional mitigation costs would rise significantly. Despite CMG’s multifaceted attempts to recover from its damaging and hurtful press coverage as well as hindered goodwill, CMG’s stock has continued to decline. Its continuous disappointing earnings have reinforced it as a volatile short position, with more declines in the offing.

Technical picture
CMG warrants lower P/E multiples to reflect today’s slower growth rate versus its competitors. It has plunged with a down gap since mid-October 2015 with multiple plunge milestones.

CMG soared above its 50- and 200-day moving averages in late March 2017 after straddling those averages for most of Q1, establishing a clear reverse head-and -shoulder pattern before finally topping at $499 on May 16. CMG then began a stark decline, breaking below its 50- and 200-day MA in June as well as its 50-week MA.

The sell-off accelerated in July following the norovirus outbreak. CMG took out its three-and-a-half year October 2016 low, making the next clear technical support level the 2012 low around $240 (see “Big level,” below). This accelerated weakness pushed CMG into a Death Cross on Aug. 2, with the 50-day SMA crossing below the 200-day SMA, while the market traded below both. CMG last entered a Death Cross in late November 2016 and subsequently dropped from $576 to just below $400 in six weeks. It entered a Golden Cross (the bullish opposite of a Death Cross) this past March before rebounding 25%.

CMG’s troubles are clearly not over, and the recent fundamental weakness following the norovirus outbreak has created extreme technical damage.   

Disclosure: The author has a short position in CMG.