Time to Sell Chipotle?
What's an investor to do with Chipotle Mexican Grill, Cramer asked Thursday. After all, two analyst camps are taking very different opinions on the restaurant operator's stock.
Credit Suisse on Tuesday initiated coverage on CMG with a 'buy' rating. On Thursday, both William Blair and Miller Tabak downgraded the stock to a 'hold.' This conflict is a great opportunity to pit the bull case against the bear case and help us better understand the stock, Cramer said. This is a tough case, though, because on the one hand, Chipotle is a best of breed company with great potential. On the other hand, the difficult market environment has beat-up on momentum stocks.
Over the past few years, Chipotle has produced considerable gains because it is an archetypal momentum stock, Cramer said. Lately, though, the stock seems to have lost its mojo. Even after its recent declines, Chipotle is still trading at 35 times next year's earnings. It’s a steep multiple, even with the company's 20 percent growth rate. Cramer was never concerned with its valuation because the size opportunity was greater than the size of its market cap and he thinks the healthy eating trend will continue to grow.
"That said, momentum has become dangerous in this newfound, more trechorous environment," Cramer warned. "This market has been picking off members of the super-growth cohort and these stocks are at serious risk of being pushed down by unrelated fears about what might happen in Europe."
Stocks like Chipotle rally when analysts consistently increase earnings estimates, Cramer said. But with the European debt crisis, the conviction is no longer there. Cramer recommends caution.
Credit Suisse is taking a positive stance, though. The firm likes the stocks for the same reasons Cramer does, including the need for caution. Cramer doesn't think its stock will fall because it delivers disappointing margins or weak same-store sales when it reports on October 20. He actually thinks the results will be robust. Given the bearish tone of the overall market, though, he worries Chipotle will need to deliver dynamite results or risk getting pancaked. Both Credit Suisse and Cramer agree that investors need to be nimble enough to sell CMG and then buy it back lower. Its long-term story is fine, but there could be some serious pain in the short-term.
The analysts at William Blair worry Chipotle's earnings estimates may be too aggressive on concerns of rising beef and poultry costs, but Cramer doesn't give much credence to their worries because Chipotle can pass these costs onto the consumer. He does agree, however, with Miller Tabak's view that fears of a global contagion from Europe, as well as the affects of a possible recession on the U.S. consumer, could hurt the stock's valuations.
So where is Cramer on all of this? He likes Chipotle long-term, but said he likes it "a lot less" right here. Even after Thursday's losses, he wouldn't be upset if homegamers rang the register. You can always buy it back at a lower level, he reminded viewers.
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