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Trader: I've been short Chipotle and will short it again

Key Points
  • Chipotle downgraded to Underperform at Bank of America, firm sees 12% downside potential
  • Rising labor costs & high EPS expectations, assuming no tax reform
  • Chipotle shares have fallen nearly 35% from their 2017 high

Chipotle investors have had a rocky 2017 -- as shares climbed as high as $496 in May before dropping, hitting a four year low this summer.

Today, Bank of America analyst Gregory Francfort issued a note arguing there's more downside ahead. The analyst downgraded the fast-casual dining company to "Underperform" and lowered his price target by 27% to $285 per share.

"We believe, assuming no significant tax reform, that 2018 and 2019 consensus EPS needs to drop at least 10%," Francfort wrote in his note released earlier today. If tax reform is approved however, Francfort sees Chipotle as "one of the most positively impacted restaurant companies."

In addition to concerns around tax reform, Francfort highlighted growing labor costs and the impact on the company's margins.

"[Chipotle] has done a very strong job managing labor in a tough sales backdrop but this limits further margin gains."

Wells Fargo: downside risk in Chipotle without significant tax reform

Halftime Report trader Steve Weiss has bet against Chipotle's stock in the past, and also sees more room to the downside ahead.

"I love the call, I don't know why I'm not short this still," said Weiss. "I was short, did make some money fortunately, then I covered and I meant to short it again, and I'm still going to."

Currently trading at 43 times next year's earnings, Weiss sees Chipotle's valuation as "egregious" despite the company's price-to-earnings multiple falling after numerous food-safety issues.

HPM Partners' Jim Lebenthal doubted Wall Street's consensus expectations for large earnings per share growth next year.

"This is not a company that you go to and see this as growth and see people going into the stores, it's quite to the contrary," Lebenthal said.

Jon Najarian sees $300 per share as the level on the charts where Chipotle might become interesting, pointing to the large majority of the company's sales coming from within the U.S. and how it stands to benefit from potential tax reform.

Karen Firestone, of Aureus Asset Management, took issue with the broader restaurant industry and noted rising competition. "[Chipotle] had a dominant position for a while, for a few years… there are now many competitors and there are competitors attacking them from all fronts," Firestone said.

Chipotle's stock price, and the company's long-standing growth story, has been tarnished since late-2015 after numerous reports of foodborne illness outbreaks in locations across the country.

"When Chipotle became not healthy, all of a sudden, they lost their patrons and that reputational thing is very hard to turn around," Michael Farr, of Farr, Miller & Washington said.

Farr sees the potential for increasing negative sentiment to be a strong deterrent for investors who may be looking for an opportunity in the stock.

"You're just going to be considered a moron if you step in front of that train to the downside."