Has Chipotle (NYSE: CMG) Put In A Bottom?

After sliding close to 20% from an all-time high that ended up forming a dangerous-looking double top, shares of fast-food name Chipotle (NYSE: CMG) look to have put in a low. It remains to be seen whether it’s a low of the temporary or permanent variety, but there are several reasons to think it’s one of the latter. 

This current dip came as the stock looked to have recovered from the market-wide softness that took shares down a similar amount from a similar high in February. But then came the company’s Q1 earnings at the end of April and the fall started all over again. A beat on their non-GAAP EPS number wasn’t enough to make up for a miss on revenue growth and there have been a red couple of weeks since. But after tagging and then bouncing off some long-term support last week, there’s an argument to be made that the selloff is over and that in the near term at least, the bulls should be back in the driving seat. 

Bullish Stirrings

The most recent of these bullish reasons came about last Thursday, when the folks over at UBS upgraded the stock to a Buy rating from Neutral. In a note to clients, analyst Dennis Geiger pointed out the improving trajectory for Chipotle as a multi-year growth opportunity takes shape. He thinks the current risk/reward profile is particularly bullish, in large part due to the recent sell off. He added "we see near-term catalysts to reaccelerate sales trends from increased dining room volumes as consumer mobility grows and elevated digital sales are retained, upcoming pricing increases, and new product & loyalty contribution." His fresh $1,575 price target suggests upside of some 20% from current prices which isn’t to be sniffed at. 

All in all, this is a solid vote of confidence for investors to be getting and those of us on the sidelines would do well to take notice, especially because Geiger isn’t the only one who’s come out strong on the long-term potential. Earlier this month, Cowen called Chipotle a ‘top pick’ on the basis that the “omnichannel presence of Chipotle leaves sales well-positioned to outperform whether the reopening narrative is faster or slower.” This is a kind of dream scenario for investors where it feels like the stock almost can’t lose when it comes to beating the street’s expectations. All the more so since the bullish call came after Chipotle announced plans to increase their minimum wage, a move that would usually dent a company’s prospects of beating the near-term consensus. 

But analyst Andrew Charles wrote in an investment note that as "we fine-tune 2021E EPS & raise 2022E following CMG's plan to raise hourly wages to $15/hour & offset with 2 price increases, proprietary survey data indicates superior value perceptions that suggest to us a muted risk of traffic erosion to the upcoming price increases. The higher wages are not expected to impact LT margin growth of 100 bps for every $100,000 increase in sales volume."

Lofty Price Targets

Cowen’s $1,850 price target is even higher than UBS’ and would put shares well above the all-time highs they were at prior to this dip. Shares were flat in Monday’s pre-market session but if they can keep their head above the $1,350 level this week then confidence should begin to flow back in and drive the bid. The stock’s RSI fell below the 30 mark last week, suggesting shares were extremely oversold and the MACD looks set to stamp a bullish crossover in the next few sessions. 

The company has a lot going for it and there’s a sense that in many ways the COVID pandemic has put it in a stronger position than it might otherwise be. Chipotle’s digital sales and drive-thru stores, which blossomed last year, are expected to be core components of its revenue engine for many years yet. As Peter Saleh from BTIG summed up last month when he came out with a bullish call on the stock; “we believe there could be upside to unit development this year and remain optimistic about Chipotlane conversions, which we believe could allow the company to operate as many as 1,000 drive-thru locations by 2025. We view the conversion potential as an underappreciated aspect of the story that should build in the coming years; the strong near-term momentum, unfolding sales drivers and long- term positioning keep us positive on shares and lead to our higher price target."

In short, treat this recent dip as a solid long term buying opportunity.