A Rare Second Chance
Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If your investing career is like mine, you have many "could-ah should-ah would-ahs" if only you could roll back time. It's sickening to be convinced of the future of a certain stock, let fear creep in and keep you from buying in, and then watch in horror as the stock sails (or falls, depending on what action you would have taken). You realize that you missed your chance to make some money.
However, sometimes lady luck will give you a second chance. It's not often, but it happens. I believe that I finally have a second chance to buy into Chipotle Mexican Grill ). I have longed for this day, and thought that it would never come. But as good fortune would have it, Chipotle is down over 40% from its all time highs earlier this year.
Score one for David Einhorn. He told you to short it. He was right. Chipotle's 3rd Quarter wasn't what analysts were hoping for. That has caused a big drop in stock price. Unfortunately for Chipotle and its shareholders, the 2nd Quarter was also short of the analyst's expectations and it dropped big. Now we are left here to pick up the pieces. Is Chipotle a buy right now?
Famous 40% Droppers
This terrible reverse in Chipotle's share price is not an unprecedented historical accomplishment. Many good companies have experienced times of sliding stock prices, only to have market sentiment and an analyst reassessment of the situation cause the stock price to soar once again. But just because things turn around sometimes, doesn't mean that the share prices always turn around.
I was a big fan of Sigma Designs ) in 2007. The whole high definition DVD war was heating up, and it began to look like Blu-Ray was getting an edge on HD DVDs. Sigma Designs seemed to be in a wonderful position to gobble up the market share of the chips that make the blu-ray players work.
As you can see, the stock price peaked in 2007 at around $70/share. But then, shortly thereafter, the stock price was nearly cut in half. That's where I got in: around $35/share. I was so thrilled to have received a second chance at owning this company. Well, long story short, I was new in stocks and didn't understand everything that was happening. Turns out Sigma Designs wasn't as well positioned as I thought, and the shares continued to tumble. The shares today are worth only a fraction of what they once were, and really this is little reason to believe we are due for a rebound anytime soon.
However, there are cases where a drop in stock price is your buying opportunity. Starbucks ) was a market darling for quite some time before a dismal 2007-2008. It must have been heart wrenching and even downright sickening to watch share prices tumble from $40/share to under $10/share.
However, if you were keeping up with the news, you realized that Starbucks was on the brink of a recovery. Howard Schultz came back on the scene with a mission to take Starbucks back to the basics of what has made them great. He laid out his plan. It was good and you could tell the company was heading in the right direction and was going to shine for years to come. That's exactly what has happened so far.
Even the mega-company Apple ) is not immune to a share price trip up. Towards the end of 2007, Apple saw its share price briefly touch $200/share. That was before the economic mess of 2008. Only about 8 months after Apple hit its high, shares tumbled to around $90/share. That was your second chance.
Anyone could see back in 2008 that Apple was just getting on a roll as a business. It was drug down by the economy, but not even the recession could keep this company's share price down for long. It has never looked back since then. It might have been difficult to withstand share prices collapsing by 50% in 2008, but the more than 600% recovery since then I'm sure has been worth it.
So is Chipotle a Sigma Designs story, or a Starbucks story? Well, no one holds a crystal ball, but here are some facts that we can consider:
- No Debt
- Profit rose double digits for the 5th consecutive quarter
- Chipotle is ranked #54 of the fastest growing businesses
- International growth is just starting
- Shophouse is revving up
- Forward P/E around 23
When you consider these things, it makes me excited enough to bet that Chipotle's share price will turn around. A 40% drop isn't fun for shareholders, but for those of us on the outside wanting in, this may be our last chance. As you will read in the disclosure below, I have no stake in Chipotle. I thought I had missed my chance. But now I'm going to have to reassess. I feel like I have my chance back.
If I were you, I wouldn't throw the burrito out with the bathwater. There are simply too many good things going on here to count this stock out.
thequast owns shares of Sigma Designs. The Motley Fool owns shares of Apple, Chipotle Mexican Grill, and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Apple, Chipotle Mexican Grill, Chipotle Mexican Grill, Starbucks, and Sigma Designs. 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.