Loving a Company to a Fault

Patrick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Among the many other things that investing can be described as, an emotional struggle is perhaps the most universally applicable. For amateurs and professionals alike, it’s difficult to sideline emotions in order to make a pure assessment of a prospective investment, but yet indecisiveness can be just as detrimental at the same time. Complications seem to become even more magnified when you find yourself simply enamored of the way a company does business. Much like the way an attractive mate might inhibit our judgments in human relationships, investors can become blinded by stunning companies, which could very quickly lead to impulsive and unfavorable investments. It’s often important to take a step back and clear the emotional palette before sending in the buy order on investments like these, so let’s try it out on a few companies that have made me face splash a palm full of water recently.

Chipotle Mexican Grill )

Urbanites from all walks of life flock to Chipotle’s restaurants to indulge in its organic rendition of Hispanic food and for good reason--the food is phenomenal, the environment edgy and the evident quality of food reduces the guilt of eating out. This of course is great news for the consumer, but unfortunately the investor can’t take such a “quality guaranteed” approach.

From a financial perspective, Chipotle has performed outstanding since its inception, but perhaps most so in the last couple of years. YoY the burrito connoisseur has cooked up quarterly revenue growth of 18.4% and quarterly earnings growth of 19.6%. These delicious numbers rightfully sparked mass interest in the investing community over the last year, to the point of a 60 P/E last spring before the bottom fell out over summer. Now that the stock price seems to have collected itself from that 32% free fall it certainly appears more attractive, but I’m not quite convinced that I heard the splat.

Excellent growth like Chipotle has demonstrated over the years is an all out fiesta on the way up, but the sun comes down (or up, rather) on even the greatest of parties. Throughout 2012 comp sales rose acceptably in the mid single digit range largely because of increased traffic and higher menu pricing. Nothing wrong with that, but what’s worrisome is that the rate of comp sales growth dropped 6.5% YoY. Management has guided down for comp sales in 2013 as well, targeting the low single digit range. Normally this wouldn’t raise too much concern, but as a historically expensive stock still priced for growth, and with the perils of Einhorn lurking in the shadows, any misstep could badger the stock. Even if hypothetically corrected to comparable levels of well performing peers, a measurable loss would still be inflicted.

Panera Bread ) and Buffalo Wild Wings ) are also outperformers in the fast casual segment that post similar numbers to Chipotle, but aren’t particularly over appreciated.  YoY Panera has actually grown earnings more so at 27%, yet steadily trades at a P/E of 30 and while lagging in earnings growth, B-Dubs has grown revenue 25% and is at a cheaper P/E of 26. Granted Chipotle’s growth prospects might be more favorable, but if the market decided to equalize the burrito for any reason, Chipotle could be digesting a 10%-20% loss from where it stands right now at a P/E of 35.

Amazon.com )

With its plethora of offerings online, Amazon is blatantly taking the helm of E-commerce, and its stock price is equally ambitious. Amazon has developed into a rather intriguing darling of the market over the last year. Most of its followers can’t really pin point the exact moves that will catapult the company into a justified valuation, like an attempt with Apple’s array of ihardware, but they all know that Amazon’s enormous online presence is poised for greatness. Couple that with their renegade valuation, trading at a P/E of 3200, and you’ve got an interesting investment on your hands. Perhaps it is just that ambiguity that entices investors, the worry of missing out on a chance to invest in the next revolutionary company, but then again maybe the market will decide that Amazon needs to start producing a more justifiable EPS, and ruthlessly tear the stock down.

These are just two instances of wonderful companies that most investors are certain will have a bright future, and that many investors are eager to jump into bed with. They are certainly attractive businesses and unlike the human mate discussed earlier, will only look better with age, but as with most things in life timing will be important. The premium valuations of these companies give them an increased susceptibility to downward fluctuations as they blossom into maturity, so don't let them break your heart on the road to riches.


Patrock19 has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Buffalo Wild Wings, Chipotle Mexican Grill, and Panera Bread. The Motley Fool owns shares of Amazon.com, Buffalo Wild Wings, Chipotle Mexican Grill, and Panera Bread. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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