Over the three previous weeks, Wall Street's major stock indexes have sent a stern reminder to investors that equities don't move up in a straight line. The iconic Dow Jones Industrial Average, benchmark S&P 500, and innovation-powered Nasdaq Composite have all retraced by at least 5% from their respective record-closing highs.
When volatility and uncertainty rear their proverbial heads, both professional and everyday investors have a tendency to seek the safety of time-tested outperformers. While the "FAANG stocks" have been popular for more than a decade, it's stocks enacting splits that investors -- including members of Congress -- have really flocked to in recent years.
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Investors have gravitated to stock-split stocks
A "stock split" is an event that allows a publicly traded company to cosmetically alter its share price and outstanding share count by the same factor. I say "cosmetically," because stock splits have no effect on a company's underlying market cap or its operations.
A forward-stock split is used by public companies to make their shares more nominally affordable for everyday investors. This can be especially useful for investors who don't have access to fractional-share purchases. Meanwhile, a reverse-stock split increases a company's nominal share price to ensure continued listing on a major stock exchange.
Though there have been instances in the past where companies enacting a reverse-stock split have gone on to make their shareholders richer (e.g., Booking Holdings), most investors are focused on forward splits. Companies whose share price is rocketing higher are typically out-innovating and out-executing their competition. In other words, they're just the type of businesses we'd expect to increase in value over time.
Since the midpoint of 2021, nearly a half-dozen prominent companies have completed a forward split, including Amazon, Alphabet, Nvidia, and even Walmart, which occurred earlier this year.
Generally, when an outperforming company announces that it'll be joining this elite group of stock-split stocks, investors pile in. But that hasn't been the case for one of Congress' most-active traders when it comes to a skyrocketing stock-split stock.
This history-making stock-split stock is being sold by one of Congress' most-active traders
Since its initial public offering (IPO) at $22 per share in January 2006, fast-casual restaurant chain Chipotle Mexican Grill (CMG 0.43%) has been a sizzling investment. With shares ending the session on April 23 at $2,915, it means Chipotle has delivered a 13,150% aggregate return since its IPO.
But one thing Chipotle hasn't done in its 18 years as a public company is conduct a stock split. On March 19, the company's board of directors announced a 50-for-1 forward split. The magnitude of this split makes its one of the largest in the history of the New York Stock Exchange. Assuming shareholders vote in favor of this split at the company's annual meeting in June, Chipotle will begin trading at closer to $60 per share on June 26.
Despite this history-making stock split, House Rep. Michael McCaul (R-TX), the second most-active trader in Congress last year -- McCaul completed 1,826 trades in 2023, based on data from Unusual Whales -- has been a seller of Chipotle stock.
Thanks to the STOCK Act, which was signed into law in 2012, members of Congress, along with their spouses and children, are required to report trades of $1,000 or larger no later than 45 days after they're completed. Based on these periodic transaction reports, we can see that after previous purchases of Chipotle stock by McCaul in late July 2023 and early November 2023, he's sold shares on four separate occasions this year, ranging from $2,326 per share to $2,598 per share.
Though this could very well be simple profit-taking by an extremely active trader on Capitol Hill, Wall Street's newest stock-split stock has drawbacks, too.
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Spilling the beans: Chipotle has clear-cut competitive advantages, but it's not attractively valued
Chipotle Mexican Grill has built its success on the belief that consumers will pay more for high-quality food. The company sources its vegetables locally, when possible, uses responsibly raised meats that are free of routine-use antibiotics, and prepares its food fresh daily without the need for freezers. Taking these extra steps has made it easier for the company to pass along higher prices to its customers.
Another reason for Chipotle's success is its reasonably small menu. Keeping the number of food offerings relatively small makes it easier for the company's employees to prepare food and keeps the line moving. To add, introducing new items can have a bigger impact when the number of offerings is limited.
Innovation has also played a role for Chipotle -- and I'm not just talking about new food items. The introduction of dedicated mobile ordering lanes, known as "Chipotlanes," has further expedited the ordering process and added a new revenue stream for the company.
Despite this trio of catalysts, two headwinds have the potential to stymie Chipotle's sizzling stock, or perhaps send shares lower.
The first concern is a stubbornly high inflation rate. Though Chipotle's most-loyal customers have demonstrated a willingness to pay more for its food, rising costs in other areas of the economy, such as housing, could begin squeezing the wallets of the company's casual customer. If select predictive indicators and money-based metrics are correct, not even Chipotle would be immune to a U.S. recession.
The other issue for Chipotle is its aggressive valuation. While its clear-cut competitive advantages do merit a premium, shares of the company are currently trading at a nosebleed multiple of 45 times forward-year earnings. There's only so much innovation that can be squeezed out of a restaurant chain that offers an organic growth rate from its existing stores of around 8% to 10%. The company's pricey stock, which seemingly leaves little room for upside in the coming quarters, could be the catalyst that's enticing Rep. McCaul to head for the exit.
