Is Chipotle Stock Now Grossly Overvalued for a Recession?

The United States and the rest of the world clearly are now in an economic recession. Estimates with unemployment of more than 20% and a gross domestic product decline of more than 20% speak for themselves. What is debatable heading into the summer of 2020 is whether this is really a bear market or if the bull market somehow might still be alive.

The stock market had been in a more than 10-year bull market, but the panic selling from mid-February through late-March took the S&P 500 down almost 35% and the Dow Jones industrials down 39% from peak to trough. The continuous rally that has been seen over the past 60 days never saw that notorious double-dip or second wave of selling pressure that so many experts and market pundits said was needed.

When stocks run up day after day, they often run too high. The same extreme on the downside can be said about when the selling on top of selling occurs. In the case of stocks that have rallied too far, Chipotle Mexican Grill Inc. (NYSE: CMG) is one candidate. Its stock price perhaps has gone much farther than the fundamentals might normally support.

When pointing out that stocks have become overbought or overvalued, there are zero assurances that the stock is ready to crash. In fact, many stocks continue to look overbought or overvalued using normal analysis for years.

As for Chipotle’s stock price, shares traded as high as $1,087 earlier this week for yet another all-time high. At the time of this writing, Chipotle was down nearly $100 per share from the highs of the prior day.

No investor or trader should rely on a single analyst rating, no matter how positive or negative it sounds, for deciding whether to buy or sell any stock. In fact, every investment decision should include an investor’s own views on the company’s internal fundamentals, general trends for the underlying sector, general trends of the economy, a company’s balance sheet and management team, and even the stock charts.

One issue that can be considered a “fair value” measure is using the consensus analyst price target from Refinitiv or other sources, which groups analyst target prices. Refinitiv’s consensus target for Chipotle is still well below $900 so far. Whether you use a share price at the high of $1,087 or the $1,000 share price on Wednesday, that is still handily above the pack of analysts.

Before averaging out all analysts, some consideration should be given to the overall bias. Regardless of an opinion on any given day, Chipotle’s stock price had been rising handily with the stock market recovery in the past 60 days. yet, after bottoming out for a recent low close of $465.21 on March 18 in the midst of peak panic selling, the price of Chipotle stock has more than doubled.

Any Chipotle stock prices under $500 on March 18 and March 19 were very short-lived. Chipotle’s one-hundred-dollar incremental closes in the past 60-day period were as follows:

  • March 19: $536.15
  • March 24: $664.05
  • April 07: $704.30
  • April 17: $820.27
  • May 08: $925.83
  • May 19: $1,009.08

What about now with a $28 billion market capitalization?

While the stock rose rapidly above the consensus price targets, many analysts have been raising their targets and expectations. Piper Sandler raised its target price to $1,100 from $850 on May 14, and KeyBanc raised its target price to $1,125 from $955 on May 21. Many other analysts raised their price targets after earnings in late April, and the highest price target that had been seen going into earnings was a $1,000 one from independent research firm Argus.

A fresh call from Wednesday, May 27, specifically told investors not to endlessly chase shares of Chipotle. Deutsche Bank’s Brian Mullan issued a Hold rating, but his target on the stock was up at $1,132. That may seem like plenty of upside (11% or so) from a current $1,000 price, but compared with Tuesday’s higher prices, it hardly seems worth chasing, considering that the stock has more than doubled in just 60 days.

In the Deutsche Bank report, Mullan noted that Chipotle’s bulls have been in full control and that the bias will remain to the upside if the focus is on long-term store growth, revenue growth and margin growth. Mullan also expects that investors will buy the stock on sell-offs. The analyst himself even sees the growth story as compelling and with very few long-term negatives to pick at.

As for using valuations to determine upside, downside or overall trading conditions, this is where the beauty or the fright will be in the eyes of each individual trader or investor. Chipotle’s 2019 earnings were $14.05 per share, and Refinitiv projects earnings for 2020 at $8.40 per share and for 2021 at $18.40 per share. While that is about 55 times expected 2021 estimates, Chipotle has proven to be nimble, and revenue expectations of almost $5.6 billion in 2020 would be less than 1% lower than 2019. The 2021 consensus forecast calls for about 17% revenue growth to $6.5 billion.

Again, being overvalued or overbought may hold little water to many investors. On the other hand, many investors will argue that the shares should have never been caught up in a 50% sell-off from February through March in the first place, and that perhaps even a 100% recovery rally doesn’t tell the full long-term opportunity in Chipotle.

The current expectation from economists leans toward the view that the economic recovery will be swift on the heels of trillions of dollars of government support and stimulus. Hopes are also high that a vaccine or a treatment for COVID-19 could come in record time from the great number of companies targeting this coronavirus.

Another trend is that the investment community has been rewarding the companies that have solid business models and can exist in a tiered economy that includes in-store, to-go and delivery in their model. Chipotle definitely fits within that description. Now it’s up to the bulls and bears to see where the shares go from here.