When FactSet released its latest analysis of hedge fund stock purchases, only one restaurant company cracked the list of the industry's most popular stocks last quarter: Chipotle Mexican Grill (CMG 0.17%).
The report from FactSet tracks which stocks the 50 biggest hedge funds buy and sell each quarter. In the final three months of last year, the most popular stock among large hedge funds was NXP Semiconductors, which spiked in interest after it was announced that Qualcomm agreed to buy the company.
After this came a number of stocks in a variety of industries, including Bank of America, Aetna, Netflix, and Deere & Co., among others. And if you go a little further down the list, to No. 8 to be precise, you find Chipotle Mexican Grill.
All told, the 50 largest hedge funds piled $1.1 billion into the burrito chain in the final three months of last year. That's less than, say, Bank of America, which saw a $1.5 billion inflow into its stock, but it's a very sizable amount for a company the size of Chipotle.
Data source: FactSet. Chart by author.
To put the inflow into perspective, Chipotle's total market capitalization is only $13.3 billion. The purchases by the 50 largest hedge funds in the fourth quarter of last year alone, in other words, account for more than 8% of that.
On the one hand, it's a bit of a surprise that Chipotle's stock has captured the eyes of hedge fund managers, who otherwise reduced their holdings in the consumer discretionary and consumer staples sectors. Chipotle's stock, in particular, has dropped by nearly half since a series of food-borne illness outbreaks came to light at the end of 2015.
The problem for current investors isn't the outbreaks themselves, which will eventually recede from investors' minds. The issue, instead, concerns the changes that the chain has had to make in response to the outbreaks -- namely, beefing up its food safety standards all along its supply chain.
Combined with the downturn in sales since the outbreaks, these additional investments have eaten into Chipotle's margins. Its restaurant-level operating margin last year was 12.8%, which is well below its 26.2% restaurant-level operating margin from 2015.
The exterior of a Chipotle restaurant. Image source: Chipotle Mexican Grill.
On the other hand, this is exactly when savvy investors strike. As Warren Buffett has said in the past: "You pay a very high price in the stock market for a cheery consensus."
It was just a year-and-a-half ago that Chipotle's stock traded for nearly $750 a share. Today it's down to $420 a share. If you assume, like I do, that Chipotle will eventually emerge from this dark chapter, as virtually every other popular food chain has in the past after their own food safety incidents, then it seems safe to assume that the burrito chain will recover its lost ground. This is particularly true when you consider that it's still opening new restaurants, and has seen its same-store sales once again return to growth.
For contrarian investors, then, it's hard to think of a better stock to keep your eye on right now than Chipotle Mexican Grill. Just like the world's biggest hedge funds seem to believe, its stock price today may look like a bargain in the years ahead.
