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Bear Of The Day: Chipotle (CMG)

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Chipotle (CMG - Free Report) shares have run up beyond their intrinsic value and it may be time to pull profits off the table. CMG shares are sitting at their all-time highs, just south of $1000 per share. Despite the business's ability to operate during the global pandemic, I do not think it warrants the aggressive valuation surge that it has experienced in recent weeks. Analysts have been reducing their short & long-term EPS estimates for Chipotle, pushing it down to a Zacks Rank #5 (Strong Sell).

A Great Business That Investors Took Too Far

Let me start by saying I like Chipotle, and I'm not just talking about the food. The business has successfully adapted to the evolving consumer. Its management team has been able to navigate the unprecedented pandemic economy effectively, with digital solutions to meet every customer's requirement.

Investors are pouring money into CMG shares, more than doubling its value in just two months and driving the stock price up to a level that is beyond reasonable. I like the business, but I'm not too fond of the price.

There is still plenty of pain ahead for Chipotle as restaurant storefronts remain either closed or at substantially reduced capacity. Chipotle is no exception to the broader restaurant decline. 

The company is well-capitalized and has relationships with financiers that your average mom and pop restaurant does not. Chipotle may gain some market share as local restaurants fail, but that does not mean its immune to the pandemic-driven financial pain.

Unemployment claims have surged to 36 million in the past 8 weeks (roughly 22% of the US labor population). How can we expect to see demand return to anything close to its pre-COVID levels anytime soon when unemployment is sitting at depression rates?

CMG Outlook

We are on the verge of a Main Street bankruptcy wave as local restaurants and bars are forced to fold due to the government-mandated shutdown. CMG will likely slide with its cohorts as the gravity of our current crisis sets in for investors.

Chipotle is a workday staple, with this fast-casual restaurant being a preferred takeout option during busy work weeks at the office. What happens if a sizable portion of the population no longer goes into the office in the post-pandemic society? Will Chipotle still be able to drive the same demand as it had before the health crisis?

I am not so sure. There is still a significant amount of uncertainty in the future of this business. These shares should not be sitting at all-time highs. If you are a holder, I would consider reducing my exposure and pulling some profits off the table.

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