Fed Up with the Fed? Buy Chipotle
03/10/2011 11:57 am EST
Low rates are here to stay for years, and fast growers like Chipotle Mexican Grill will be among the biggest beneficiaries, writes Louis Navellier in Blue Chip Growth.
The bulk of the federal government's more than $14 trillion in cumulative debt, which is now 100% of the US's annual GDP, is financed in Treasury bills and notes with an average annual interest rate under 1%.
The cumulative interest charged in the federal government's fiscal-2010 budget was $414 billion. So if the Fed raises key interest rates to, say, 2% or 3%, the interest alone on the federal budget deficit could easily rise to $1 trillion or even $2 trillion.
The Federal Reserve is in a box and cannot significantly raise key interest rates without blowing up the federal budget, so I anticipate that the Fed is going to maintain low interest rates for a prolonged period. [Axel Merk has written frequently and eloquently about the Fed’s dilemma—Editor.]
It is uncertain how long the Fed's zero-interest-rate policy and qualitative easing will last. But I believe it's safe to say it will continue for the next few years. During this time, frustrated investors will continue to move their funds to the stock market.
We find ourselves at the beginning of a very powerful bull market—and our growth stocks will reap big benefits.
If you're a fan of Mexican food, then you've probably eaten at, or at least heard of, Chipotle Mexican Grill (NYSE: CMG), which owns and operates one of the most popular Mexican food franchises in the country. The company has over 1,000 locations throughout the US and Canada.
I'll cover the latest earnings numbers in a moment, but the real story here is the incredible—and successful—expansion plans of this company. Chipotle has plans to open another 135 to 145 locations within the year. The company operates in just over 30 states, so it has ample room for growth.
I know food ingredient costs are increasing rapidly, but they are a reasonably small part of the overall final price for Chipotle's products. Even with rising input costs, in the latest quarter comparable restaurant sales increased 12.6%, while restaurant-level operating margins were 25.9%, an increase of 140 basis points. This suggests to me that Chipotle is handling the higher costs well.
In the fourth quarter, Chipotle's total sales rose 24%, to $482.5 million, compared with the same quarter a year ago. During the same period, its earnings rose 48% to $46.4 million, or $1.47 per share. The analyst community was expecting earnings of $1.29 per share and sales of $470.7 million, so the company posted a 14% earnings surprise and a 2% sales surprise.
For the first quarter, the analyst community is expecting 18% annual sales growth and 23% earnings growth. You should buy this moderately risky stock below $289. [Shares slipped below $249 in Thursday’s selloff—Editor.]