October 28, 2013 - Could Burritos be the Next Hot Commodity?
The stock market is having a good year. The S&P 500 is up 22.78% year to date, while the NASDAQ is up 30.01%. The Dow Jones Industrial Average is the laggard of the bunch with a seemingly paltry 18.28% increase.
As tends to happen with averages, some individual stocks are up even more than the major indices. Some stocks, like Tesla (TSLA) and Netflix (NFLX) are up an incredible amount, while other groups of stocks, like solar or Chinese internet stocks have been going crazy recently.
Those are all exactly the kind of thing you would expect to be pretty frothy at this stage of a bull market, but there are other stocks that have posted big gains this year that seem to be much more reasonable investments.
I'm talking about burritos.
Seriously, Chipotle Mexican Grill (CMG) has gained 76.12% so far in 2013 and seems like it could easily keep going. Roughly 20 points of CMG's year-to-date gain came on Oct. 18 when the company released its third-quarter earnings report.
The company pulled in $2.66 per share, compared to $2.27 in the year-ago period. Revenue was $826.91 million, compared to $700.5 million in the year-ago quarter. Analysts had expected the company to earn $2.78 per share on revenue of $820.43 million.
At first glance, it may seem surprising that the stock price would jump by about $70 after the company missed earnings estimates, but there are lots of good things going on at Chipotle that make the earnings miss seem like no big deal. First, revenue topped expectations. Second, same-store sales rose by 6.2% and the company said it expects that trend to hold for the rest of the year before slowing a bit in 2014. The company also announced plans to raise prices, which will likely improve margins that have been squeezed by rising ingredient prices.
There are other positives for Chipotle that aren't captured by the numbers. The company is trendy and has a reputation for healthy food. Both of those factors lead me to believe that the company is unlikely to lose many customers when it raises prices. In addition, Americans seem to be becoming more health conscious. So it seems likely that the company could expand its share of the market despite having plans to increase prices.
The company may have an additional advantage over many fast food chains with these newly health conscious eaters. The traditional hamburger-centric restaurants are going have a very hard time getting consumers believe that new menu items are healthy. Efforts like Burger King's (BKW) new "Satisfries" may have some effect, but various attempts to make a healthier hamburger have failed in the past and seem unlikely to succeed in the future.
Trendiness is much harder to assign a value to, but the company appears to be dedicated to making Chipotle the kind of place where people who care about such things eat. As Starbucks (SBUX) and Apple (AAPL) can attest, being trendy is good for business. Consumers who can afford to care about being cool can afford to spend more on coffee, computers and burritos.
Image courtesy of stockcharts.com
With so many things working in its favor, investors could consider a bull-put credit spread on CMG. The Dec ember 465/475 bull-put spread yields a credit of $1.00 per share. That's a return of 11.1%, or 75.10 on an annualized basis (for comparison purposes only). This position will return a full profit so long as the stock is above $475 at December expiration. That gives this trade about 9% downside protection.