Chipotle Cooking Up Fresh Gains

04/12/2011 2:58 pm EST


Andrea Kramer

Associate Editor, Schaeffer's Investment Research, Inc.

The fast-rising stock of the fast-growing restaurant chain remains poised to surprise numerous skeptics, writes Andrea Kramer of Schaeffer’s Investment Research.

The folks at D.A. Davidson recently took a field trip to Denver, where the group strolled through several fast-casual restaurants to get a fundamental feel for how things work, and to gauge corporate—and consumer— sentiment.

(See Kicking the Tires at Fast-Casual Restaurants,” Barron’s, April 5.)

While touring Chipotle Mexican Grill (CMG), the author’s posse received confirmation that produce was relatively expensive at the moment, but that "food-cost pressures will be eliminated with the national price increase."

Furthermore, the writer noted that "new-store economics are benefiting from both the very successful A-Model format" of new smaller-sized outlets, as well as Chipotle's strategy for opening new stores.

The folks at D.A. Davidson expect the restaurant chain's food-cost pressures to continue ebbing into the third quarter, and also expect “limited consumer pushback" to the price increase. In addition, the author expressed "confidence that the company will successfully execute on the large growth opportunity ahead."

Contrarian Takeaway:
Along with the promising fundamental backdrop highlighted by D.A. Davidson, CMG also boasts impressive performance on the charts.

During the 60 sessions through April 5, the equity has outperformed the broader S&P 500 Index (SPX) by 16.5%, tagging a new all-time high of $280.58 on that day. [It traded a bit below $275 Tuesday—Editor.]

However, despite CMG's solid fundamental and technical set-ups, the Street is hesitant to board the bullish bandwagon. According to Zacks, 17 out of 25 analysts maintain "hold" or worse opinions, while Thomson Reuters pegs the consensus 12-month price target at $268.32—representing a discount to CMG's recent record.

Plus, despite depleting by 10% during the past month, a healthy 10.8% of the security's float remains dedicated to short interest.

As CMG continues to impress both on and off the charts, a capitulation by the bearish holdouts could translate into contrarian upside for the shares. A flood of upgrades or price-target increases, or a continued short-covering situation, could help the stock assail even more new highs.

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