CMG Stock Looking Cheap
Famous burrito chain Chipotle Mexican Grill, Inc. (NYSE:CMG) was the victim of the worst foodborne disease outbreaks of last month. CMG stock has perpetually headed southward ever since news broke of the E. coli outbreak. The massive slump is, however, unwarranted, given that Chipotle had little to directly do with the problem. Here’s why I believe the price slump in Chipotle stock creates a great entry point for prospective investors.
Has CMG Stock Bottomed?
To begin with, one must appreciate Chipotle’s swift and targeted action to tackle the problem. The company, right away, shut down 43 of its potentially affected outlets, had them cleaned, cleared out old stock, and reopened all outlets within a few days.
Secondly, we may now have a confirmation that Chipotle was not directly responsible for the outbreak. Instead, the culprit was most likely a supplier or some other external source. Initially, there were some reports that the outbreak had to do with unhygienic conditions at the back-end of the restaurants (that is, dirty kitchens) or negligence on the part of the workers. But apparently, the problem is persisting, as another big company got hit with the same bad news: new cases of E. coli (Escherichia coli), which are being linked to the second largest retailer in the country, Costco Wholesale Corporation (NASDAQ:COST), have emerged this week.
What has surprised me the most is that although Chipotle’s E. coli strain is not life-threatening, unlike the strain discovered at Costco, CMG stock has seen a massive dent in its price, while COST stock only slipped slightly. (Source: “E. coli tied to Costco more dangerous than Chipotle outbreak,” Yahoo! Finance, November 25, 2015.) Why the unfair treatment? Clearly, Chipotle stock witnessed the classic lemmings-like behavior, where nervous traders jumped off the cliff, one after the other.
Investors may have been wrongfully led to believe that the slump in CMG stock was solely due to the E. coli scare, but it doesn’t take an MBA to figure out what’s really going on here. The outbreak did trigger the selling, but it was the traders’ herd mentality behavior that led to its perpetual downfall.
CMG stock is a darling on Wall Street, with more than 94% of the company’s outstanding shares currently held by institutions. The downside of high institutional ownership, however, is that such stocks can have very erratic and volatile price movements. Institutions usually have larger stakes than individual investors. Thus, they bear a greater impact on a stock’s price.
Likewise, herding is commonly witnessed in stocks with such high institutional holdings, because as one institution dumps it, others follow suit, resulting in catastrophic declines. In the long run, the stock will move back to its fair value as good news invites these traders back in.
The Bottom Line on CMG Stock
Financially, Chipotle is strong, with solid cash reserves and no debt. The affected Chipotle outlets made up only a little over two percent of its total outlets and are not expected to significantly affect its revenue over the long term. However, the inability of the company and the authorities to pinpoint the source of the outbreak remains a problem in the short run.
With another company facing the same kind of outbreak, we can safely say that Chipotle is not the only one with its reputation at stake. Understandably, this will hurt the brand, but in the long term, the commotion will settle and when it does, CMG stock will likely regain some of its losses.