Chipotle falls, Toyota undervalued

A few months ago I wrote about the ridiculous valuation differences between Chipotle Mexican Grill (CMG) and Buffalo Wild Wings (BWLD). I chose to buy BWLD, for which I have paid dearly; up until these last few days, an investment in Chipotle would paid off handsomely.

However, over the past few sessions, CMG has shed over 15%, with an awful 10% loss today. These huge losses haven't even been due to earnings warnings or other bad news; simple negative market sentiment has sent investors running.



I'm disappointed I missed out on $20 of negative downside; over the past few weeks, I have been eying CMG as a potential short. (Well, I use puts, because there's less downside potential, greater upside potential, and less initial investment).

Last quarter, Chipotle reported fair earnings, with good growth in new stores. However, there were some cautious indicators, like slowing or stagnant same-stores sales growth.

Due to a slowing economy, higher prices of raw materials, and a continuation of the trend seen last quarter, I expect CMG to post lackluster earnings when it reports within the next month or so. I was waiting to purchase puts so I could get February contracts with less of a time-value premium, but unfortunately, I missed out on a lot of downside movement.

I don't know what CMG will do in the short term. If the market pops 2% on Monday, CMG may bounce up 5% along with it. If market sentiment continues to be negative, CMG may still slide. Either way, my six-month forecast remains very negative. CROX lost half of its value after a mildly disappointing quarter; CMG could be no different later this month.

Meanwhile, I don't understand why Toyota continues to slide sideways and downward. Just today, Toyota surpassed Ford in U.S. auto sales, and it will likely surpass GM in worldwide global sales this year. Toyota is a huge company that's still growing, in established markets (like the US) and emerging markets (China, etc.). Sure, a weakening economy may hurt Toyota, but I think that it's time for shares to start appreciating in value.






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A Weak Week?

Note: This is published before the markets open for the week of 11/12.

The performance of the major indexes over the past week can be viewed two different ways.

As I have said before, predicting the market is nearly impossible and (overall, for a long term investor) generally fruitless. However, when writing a blog about the stock market, it's necessary and fun.

This past week, the Dow and S&P 500 both shed about 4%, while the NASDAQ endured an 8% haircut. (The majority of these losses came on Thursday and Friday, with some of the indexes and many individual stocks actually posting gains between Monday and Wednesday).

Many of the high-flying tech stocks (that I shorted in my fantasy portfolio; read my previous post) led the market downward.

• Google lost over 10%
• Research in Motion dropped over 20%
• Baidu.com dropped nearly $100 from its all-time high around $430 early in the week to $340 on Friday
• Chipotle Mexican Grill, on which I stated I had a bearish outlook, lost about $20 from $140 to $120
• Even the blue-chip Cisco lost 10% after reporting good (but not spectacular) earnings

Both the S&P 500 and Dow are both within a few percent of their mid-summer lows, with the NASDAQ a little farther away due to a bigger run-up in recent months.

Many professional analysts cite those summer lows as an important level of support. If indexes crash through those lows, look for new, much lower bottoms. But if the markets tap the barrier and bounce back, the bull market may be revitalized.



However, looking at it simply instead of technically, I see reason for weakness to persist in the markets.

Oil, though now off of its highs, is still in the mid-nineties per barrel. Gasoline and other distillate prices are now only starting to catch up to the rise of the price of oil, so watch for consumers to now finally be effected by $90+ oil.

The dollar is crashing. Though such terms haven't been used yet, and though I'm not an international monetary policy specialist, I'm comfortable using that term. After reaching parity with the dollar within just the past month or two, the Canadian dollar now trades around $1.05. When currencies are appreciating faster than markets (with 5% monthly changes of 10+% yearly changes), I think that the depreciation is becoming dire. The dollar is hitting new lows against the Euro on a daily basis. As the Fed continues to weaken the dollar through cutting rates, it's making the problem even worse.

Lastly, the subprime problem is far from resolved. Major banks and investment houses continue to write down their books for losses in securities. Major corporations like Bank of America, AIG, and Morgan Stanley are plummeting in value. Homebuilders, though recently pushed out of the spotlight, may still be in danger of going bankrupt. As the cost of imported goods starts and continues to rise, Americans won't have money to buy houses.

There are just too many logical reasons why the market could continue to go down, while there is little logic for an upside bounce. I own some puts in an ETF that tracks the S&P 500, and when they expire this week, I may buy an Ultrashort ETF. I could easily be proven wrong in the short or long term, as political, economic, corporate, and emotional conditions change, but I see no reason for the markets to immediately rebound in the context of today's environment.

People Love Ignoring Valuations: BWLD vs. CMG

The events of last night and today, concerning two stocks, literally baffle me.

The two stocks are Buffalo Wild Wings (BWLD) and Chipotle Mexican Grill (CMG).

Both companies reported earnings last night.

CMG came into earnings trading at a 80 trailing P/E and a 50+ forward P/E. Perfection is clearly already priced in. BWLD, on the other hand, traded at a much more modest 40 trailing, high-20s-forward P/E. It wasn't cheap, but it was clearly cheapER.

Chipotle reported numbers that were in-line with estimates. They had a mixed future outlook; they plan to open new stores internationally, but at the same time, existing store sales are expected to fall from 12% this past quarter, to "high single digits" for all of 2007, to "low to mid-single digits" for 2008.

Though the new stores will be a source of growth, a company cannot expand infinitely. Don't you think investors might be shaken by the bleak outlook for future same-store sales growth?

At the same time, Buffalo Wild Wings reported revenue that met the street's expectations, with earnings that were just two pennies lower. They, however, reiterated their forecast for next year: 15% unit growth, 20% revenue growth, and 25% earnings growth. (They had the same goals this year, and have met them thus far). There are some minor challenges, like gambling licenses in Las Vegas and higher prices due to bigger wings. However, the overall outlook was very promising without any glaring problem.


So how did Wall Street react to these two different reports? Logically, you'd expect BWLD to be flat, or even up, while CMG seems like it should be flat or down.

However, rationality is apparently dead amongst investors.


Buffalo Wild Wings dropped almost 30% at one point. Currently, it's trading down 20%.
Chipotle is UP $5, or 4%.

To me, this is literally insane. How do investors see any value in a company with a 55 forward P/E? Yes, the company is growing quickly, but it can't grow as quickly forever, and mature companies DON'T have P/Es of 55.

McDonalds has a forward P/E of 19. Yum Brands (KFC, Pizza Hut, Taco bell, and more) has a forward P/E of 21.

Buffalo Wild Wings is now trading at that same valuation - a 21 forward P/E. The company is supposed to grow at 25% - much better than YUM's 17%.

Chipotle has grown very quickly over the past, but is only predicted to grow at about the same 25% next year.



As a value oriented investor, I'm buying BWLD. I actually purchased some after-hours yesterday (because I thought at 15% decline after the non-awful numbers was a little dramatic), and I picked up some more today after it dropped a few more points.


I have no position in CMG, but I wouldn't be long right now. Who knows, maybe hysteria will pump CMG to 160 while BWLD hangs around 30 for the next month or two. But as a long-term value investor, I see value in Buffalo Wild Wings, and nothing but hype in Chipotle.

Rubbing my Crystal Ball

There's some major (and minor) events in the next few days that I'm going to try to predict here.

First, since I've been following the stock (with no position) lately, I'll comment on Chipotle Mexican Grill (CMG), releasing earnings after the bell today:

I think they're going to meet current estimates, and possibly revise downward for the future. But even if they meet or slightly exceed, watch out for a negative reaction, as the stock has a 80 trailing and 50 forward P/E.



Oil was down over 3% today, a huge deal as it's been hitting new highs lately. Tomorrow's going to be a big day. Inventory reports come out in the morning, and the Fed will release the new funds rate at 2:15. If inventory shrinks and the Fed cuts, watch for today's losses to be wiped away. If inventory increases and the Fed keeps rates steady, watch out for further price declines. Read my previous article about the bubble in the current price of oil; the second scenario I outlined could be the catalyst for a major price correction. I'm looking to get out of my Conoco calls, and get into some Exxon or Chevron puts....

...because both Exxon and Chevron report earnings later this week, and they will probably disappoint, as Conoco, BP, and other companies have done thus far. Refining margins were terrible during the 3rd quarter, squeezing profits. A bad quarter and falling profits could mean a major drop in oil stocks, which have enjoyed 20+% price increases this year.

So, concerning oil, I think that the Fed cuts .25%, oil is flat after a flat inventory report, but begins to weaken during the winter season.. I think I'm going to get some long-term puts, and see how that works out for me.

Disclosure: Long Marathon Oil stock, Conoco Calls. Could become long puts at some time soon.