Great Food, Greater Investing Opportunity
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Every investor likes to think they have a keen eye for that “diamond in the rough;” the next Apple or Priceline that no one has heard of yet. But what if—with regards to the investor’s returns at least—that diamond is not “in the rough,” so to say? What if it is a popular company being frequently traded right before their eyes? Chipotle Mexican Grill (NYSE: CMG), at current levels, is one of those gems that’s worth chasing.
Why? Let’s start with the reason behind Chipotle's steeply discounted stock price. Last week, the company reported second quarter earnings that indicated “sales growth in restaurants was 8 percent, short of the average analyst estimates of 10 percent. In the first quarter of 2012, Chipotle’s sales increased 12.7 percent” (Benzinga). Chipotle, among other restaurants such as McDonald’s (NYSE: MCD) and Starbucks (NASDAQ: SBUX), blames the slowdown on the economy. Specifically, the deceleration of consumer spending can be held accountable for the industry’s headwinds. According to Reuters, “Consumer spending, which makes up about 70 percent of U.S. economic activity, increased at a 1.5 percent rate, a step down from the 2.4 percent pace logged in the previous three months.”
Yet diminishing sales growth is not the only bearish factor wrestling down Chipotle's stock price. Forward looking guidance offered by CFO John Hartung warned “that the drought the US has experienced recently could hurt food costs later in the year” (Benzinga). Thus, the industry is being squeezed on both the supply and demand sides. Should it be surprising, therefore, that Chipotle “missed” on its second quarter earnings report? I put quotation marks around the word “missed” because CMG’s earnings per share still came in at $2.56, obliterating the $2.30 consensus estimate of 25 analysts covering the company. And this report has led to nearly a 25% sell-off of the stock? Does Chipotle truly seem to have lost a quarter of its value in the past quarter? I think not.
Some readers might argue that buying CMG stock right now would be like “trying to catch a falling knife.” This phrase, however, only applies to doomed companies that are bought on a downturn. CMG, on the other hand, is a stellar company. Its story and growth is well documented and its stock is often lauded as one of the premiere equities of recent years. This downturn, when all is said and done, will be a mere bump in the road. How do I know this?
Chipotle’s values. “Food with integrity,” a peculiar sounding phrase, is found right at the bottom of the company’s homepage. The company is committed “to finding the very best ingredients raised with respect for the animals, the environment and the farmers.” Such pledges have boded well in the past for companies situated in the food industry. Upon reviewing Chipotle's website, I am reminded of (what used to be) a little ice cream company from Vermont known as “Ben & Jerry’s.” Bought out by Unilever Brands in April of 2000, Ben & Jerry’s has a threefold mission, the first of which is social: “To operate the Company in a way that actively recognizes the central role that business plays in society by initiating innovative ways to improve the quality of life locally, nationally and internationally.” As a side note, most anyone who knows of the company, or shall I say brand, adores it. Perhaps I should reference Whole Foods Market (NASDAQ: WFM), a recent stock market phenomenon. “Values” is one of their websites main tabs and their reputation for quality products and service goes without saying.
Chipotle Mexican Grill, like these other companies, maintains a clean-cut image and provides high-quality products. In the long haul, this has proved to be a successful strategy for companies in the food industry. Don’t let this temporary pullback fool you, CMG is a solid stock to buy and hold.
FatNDSquirrels has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Chipotle Mexican Grill, McDonald's, Starbucks, and Whole Foods Market. Motley Fool newsletter services recommend Apple, Chipotle Mexican Grill, McDonald's, Starbucks, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.