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Is Chipotle Too Expensive?

I was talking to a smart restaurant analyst on Tuesday and asked him, "How expensive is too expensive for restaurant stocks?"

He said: "Expensive stocks can remain that way for far longer than the typical investment horizon."

Starbucks , Cheesecake Factory etc. were that way for years—always 'too expensive' but it worked out for investors.

Chipotle, BJ Restaurants , Buffalo Wild Wings are 'too expensive.' See above. Repeat."

This gets us to Chipotle and this recap of what I said on air Tuesday:

Its price rise of nearly 10 percent was based on no news—other than, perhaps, the long anticipated opening last week of the company's Shophouse Asian concept in Washington. (It got rave reviews.)

That single restaurant, with no other ones planned, in effect added $1 billion, or roughly 11 percent, to the company's market cap.

Is one restaurant really worth that much?

Investors hoping for a roll-out of thousands more obviously thinks so.

But one successful chain doesn't guarantee that another by the same operators will be successful. (This is, after all, the finicky restaurant business.) And if the company does launch a chain, industry insiders will be watching to see how it's structured. Trying to put a new concept under the same operating/purchasing/purchasing structure as the original—in pursuit of synergies—can be troublesome.

Also, keep in mind this run-up in Chipotle's shares brings that stock back to where it was after tumbling in the wake of last quarter's earnings/margins miss. (Next earnings are expected October 20.)

All of this Chipotle chatter prompted Jim Cramer, a big Chipotle fan, to run out on set and agree that Chipotle had run-up too fast. (The stock promptly fell down.)

My bottom line: Can't argue with Chipotle the company; execution/concept superb. But like all momentum names, it's also priced for perfection. That sounds like boilerplate until it isn't—something Netflix investors learned the hard way.

P.S. And for what it's worth: When compared with Panera , (which I got wrong) Chipotle over the past five years is up 500 percent; Panera, 100 percent.

Questions? Comments? Write to HerbOnTheStreet@cnbc.com

Follow Herb on Twitter: @herbgreenberg

Disclaimer

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