Chipotle Mexican Grill(NYSE: CMG) has become one of the most prominent fast-casual restaurant brands in the world. But all companies, no matter how well consumers like them, cycle between good and bad times. With Chipotle's stock down around 15% from its 52-week high, long-term growth investors might want to jump aboard. And, yes, there are some negatives to understand before you do.
Here are three reasons to buy Chipotle while its stock performance is weak.
1. Chipotle isn't done growing
Chipotle is not a small restaurant concept, having around 3,500 locations globally. To be sure, its big growth years are behind it, so in some ways, investors have missed out on what may be the most exciting expansion phase. But that doesn't mean that Chipotle is done growing. In the second quarter of 2024 the company opened 52 new locations, which is an annualized run rate of about 200 openings a year. Clearly, growth is still in the cards.
Image source: Getty Images.
A quick comparison, meanwhile, will help give some dimension to the upward trajectory. Competitor Taco Bell, which is owned by Yum! Brands(NYSE: YUM), operates around 8,500 of its Mexican-themed restaurants. If Chipotle opens 200 locations a year it will take more than a decade of growth to catch up to Taco Bell.
Notably, growth isn't coming at the expense of performance. Same-store sales came in at a very impressive 11% in the second quarter of 2024. That's probably not a sustainable figure, but even half of that would still represent very strong performance in the restaurant industry, where low single-digit same-store sales growth is usually considered pretty good. All in, it seems like there's plenty of growth ahead for Chipotle.
2. The CEO leaving isn't the end of the world for Chipotle
Investors have a habit of overreacting to news. So when Chipotle's highly regarded CEO, Brian Niccol, abruptly announced that he was leaving to run Starbucks(NASDAQ: SBUX), investors were worried and dumped Chipotle's stock. Fair enough, given that the company will have to find a replacement, and until it does there could be some uncertainty in the business outlook.
Only Niccol didn't operate in a vacuum. He had a team around him, and that team is staying behind to run Chipotle. In fact, a company veteran who recently announced plans to retire has agreed to stick around for a bit to help keep the company rolling along. There's no reason to believe that Chipotle is going to fall out of bed because one person has left, even though that person was the CEO. If you are a long-term growth investor, the negative sentiment here is probably a buying opportunity.
3. Price drops are a normal part of Chipotle's upward trajectory
Growth stocks don't simply rocket higher and higher. They tend to follow a jagged upward path. Chipotle is no different. If you look at the price graph below, you can see that big price drops are pretty normal for Chipotle.
The recent 15% or so drop has left the stock 15% or so below its all-time high. Swift price declines have, historically, been chances to buy Chipotle. To be fair, there's no telling how deep the decline could get. The stock has fallen by 50% or more multiple times. But if you don't take a contrarian stance, acting while Wall Street is worried, you may never buy Chipotle.
In other words, don't miss out on a pullback in Chipotle. The growth story is still strong, and the big negative news is probably overdone. If you are worried about a deeper decline, initiate a starter position and add more if the stock continues to fall.
Chipotle: Act while the iron is hot
There are no crystal balls on Wall Street, so it is impossible to know if Chipotle's current stock weakness is a sign of long-term trouble or just a blip on what has been a long trek toward higher prices. But if you dig into the backstory here, it looks highly probable that the blip theory is more likely. If that sounds reasonable to you, don't miss out. At least buy a starter position in Chipotle's stock today, because you may not have the same chance to do it tomorrow.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
