Chipotle: Time to Bite?

02/16/2016 8:00 am EST

Focus: STOCKS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

This new recommendation has been one of the top fast-food stocks of the last 10 years and a favorite of growth stock investors, notes Ian Wyatt, editor of Million Dollar Portfolio.

Last fall, Chipotle Mexican Grill (CMG) had E. coli outbreaks linked to its restaurants. In total, 52 customers have gotten sick.

If that wasn't enough, a norovirus outbreak in Boston affected 120 customers. It now appears that these food safety issues have ended.

Chipotle stock had been a high flyer, rising to $758 last summer. But in response to the food safety concerns, the stock plunged 47%.

The sell-off for Chipotle stock was deserved. After all, food safety is a serious issue. During the fourth quarter of 2015, same-store sales shrank nearly 15%. With sales falling, net income plunged 44%.

Also announced in the earnings report was that the company is cooperating with a criminal investigation by a US Attorney in California. The subpoena requires documents related to food safety going back to 2013.

As a result of the food safety concerns, analyst estimates have been dramatically trimmed. The consensus EPS estimate for 2016 is now just $12.80, a drop of 37%. And it's likely that estimates could decline even more.

But these headwinds should be temporary. Within the next year, most people will have forgotten about the E. coli outbreaks at Chipotle. And I expect the business to return to normal.

Chipotle has plans for 220-235 new restaurants for 2016, marking more than 10% location growth. Same-store sales should start rebounding in the second half of the year.

Additionally, Chipotle is testing two new restaurant concepts: ShopHouse Southeast Asian Kitchen and Pizzeria Locale. If either of these concepts gets traction, it could add to the company's longer-term growth.

The recent and sharp decline presents an attractive opportunity to start accumulating a small position in the stock.

Chipotle has been a growth stock that I've always wanted to own. But I couldn't justify the valuation on the stock. Now that shares have taken a big haircut, this presents an attractive entry point.

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