Chipotle Mexican Grill Update

Chipotle Mexican Grill (CMG, $66.04, down $0.27) has continued its downtrend today following last week’s drubbing. The stock was hit hard last Thursday despite an outstanding 2Q earnings report. The biggest reason for the sell-off was the fact that the company said that sales growth had softened through July and that higher food and labor costs could pinch profits.

On Thursday morning, there were a bevy of downgrades on Chipotle. Jefferies & Company lowered its rating on the stock from “Buy” to “Hold”, JP Morgan downgraded the stock from “Overweight” to “Neutral” and RBC Capital Markets chimed in with a “Sector Perform” rating, a step down from “Outperform”. Don’t get me started. The analysts that made these calls were totally late to the party. The breakdown in Chipotle has been building for weeks and all an investor had to do was look at the charts.

If I had no idea Chipotle was announcing earnings and that the stock was on the verge of a major breakdown, I could have lost a lot of money. What would have happened if I was a new investor and I did some research and my first investment was going to be in Chipotle? I would have seen that three other “Wall Street” analysts agreed with my analysis and if I would have bought 100 shares at $80, I’d be showing nearly a 20% loss. That’s one of the problems I have with stock upgrades and downgrades.

Of course, we don’t rely on upgrades and downgrades for our trades but they can have an affect on our positions. This time, those downgrades are holding the stock in the $60’s for the time being. The August 70 puts (CMGTN, $5.80, unchanged) were profiled at $1.60 in the blog and should have been closed Friday for gains upwards of 200%. This was only a one to two day trade but some of you may have left some on the table hoping for another leg down.

The trade was another homerun and its best to close the trade instead of trying to squeeze a few more dollars out of it. I can tell you from experience, sometimes keeping a trade open for just a day or two longer can have a dramatic impact on your returns. There is support for Chipotle here in the mid-$60’s and further support in the upper-$50’s but it looks like the mid-$60’s are going to hold through the August expiration date.

Rick Rouse
Rick@OptionsMentoring.com

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