Could burritos be the next hot commodity?
Bobby Raines 10/28/2013
The stock market is having a good year. The S&P 500 is up
22.78% year to date, while the NASDAQ is up 30.01%. The Dow Jones
Industrial Average is the laggard of the bunch with a seemingly
paltry 18.28% increase.
As tends to happen with averages, some individual stocks are
up even more than the major indices. Some stocks, like Tesla (
) and Netflix (
) are up an incredible amount, while other groups of stocks, like
solar or Chinese internet stocks have been going crazy
Those are all exactly the kind of thing you would expect to be
pretty frothy at this stage of a bull market, but there are other
stocks that have posted big gains this year that seem to be
much more reasonable investments.
I'm talking about burritos.
Seriously, Chipotle Mexican Grill (
) has gained 76.12% so far in 2013 and seems like it could easily
keep going. Roughly 20 points of CMG's year-to-date gain came on
Oct. 18 when the company released its third-quarter earnings
The company pulled in $2.66 per share, compared to $2.27 in
the year-ago period. Revenue was $826.91 million, compared to
$700.5 million in the year-ago quarter. Analysts had expected the
company to earn $2.78 per share on revenue of $820.43
At first glance, it may seem surprising that the stock price
would jump by about $70 after the company missed earnings
estimates, but there are lots of good things going on at Chipotle
that make the earnings miss seem like no big deal. First, revenue
topped expectations. Second, same-store sales rose by 6.2% and
the company said it expects that trend to hold for the rest of
the year before slowing a bit in 2014. The company also announced
plans to raise prices, which will likely improve margins that
have been squeezed by rising ingredient prices.
There are other positives for Chipotle that aren't captured by
the numbers. The company is trendy and has a reputation for
healthy food. Both of those factors lead me to believe that the
company is unlikely to lose many customers when it raises prices.
In addition, Americans seem to be becoming more health conscious.
So it seems likely that the company could expand its share of the
market despite having plans to increase prices.
The company may have an additional advantage over many
fast food chains with these newly health conscious eaters. The
traditional hamburger-centric restaurants are going have a very
hard time getting consumers believe that new menu items are
healthy. Efforts like Burger King's (
) new "Satisfries" may have some effect, but various attempts to
make a healthier hamburger have failed in the past and seem
unlikely to succeed in the future.
Trendiness is much harder to assign a value to, but the
appears to be dedicated
to making Chipotle the kind of place where people who care about
such things eat. As Starbucks (
) and Apple (AAPL) can attest, being trendy is good for business.
Consumers who can afford to care about being cool can afford to
spend more on coffee, computers and burritos.
With so many things working in its favor, investors could
consider a bull-put credit spread on CMG. The Dec ember 465/475
bull-put spread yields a credit of $1.00 per share. That's a
return of 11.1%, or 75.10 on an annualized basis (for comparison
purposes only). This position will return a full profit so long
as the stock is above $475 at December expiration. That gives
this trade about 9% downside protection.