Why I'm Chowing Down on More Chipotle

This article is part of our Real-Money Stock Picks series.

In April, I finally pulled the trigger and bought some shares of quick-serve burrito wrapper Chipotle Mexican Grill (NYSE: CMG  ) for the real-money portfolio I'm managing for Fool.com. As it turns out, the price retreat I had long hoped for came to pass after I went for the shares. But, oh well: I see the lower price as an opportunity to add a dash more of Chipotle's special spiciness into my portfolio.

My basic buy thesis hasn't changed since April. The Denver-based restaurant chain continues to have great growth potential, with about 1,260 restaurants in the U.S. When you compare that number to, say, former parent McDonald's (NYSE: MCD  ) , which has 33,510 mostly franchised stores, you can imagine that Chipotle's got some room for expansion.

In addition, Chipotle could really give investors a pleasant surprise in the future if it ends up expanding its style to other concepts, like the ShopHouse Southeast Asian Kitchen concept it's currently testing.

Last but not least, Chipotle's focus on "Food with Integrity" -- adding naturally raised, organic, locally grown, and additive-free ingredients whenever possible -- makes Chipotle a company that voluntarily aims for loftier goals than most rivals. That makes Chipotle far more similar to Whole Foods Market (Nasdaq: WFM  ) (which also resides in my portfolio) than most quick-serve restaurant peers.

Companies with lofty ideals and innovative ideas on how to run responsible, sustainable businesses are exactly the types of companies I seek to include in my real-money portfolio.

Overall market weakness and fears about Europe have led to lower prices on lots of stocks lately. Chipotle's price got particularly slammed in late June after an analyst mentioned the specter of decelerating same-store sales growth. However, I observed that such panic at the metaphorical bistro, leading some to ditch their shares in Chipotle and other restaurants, gave savvy investors an opportunity to buy for the long haul.

Despite Chipotle's recent weakness, it still doesn't look like a traditionally bargain-priced stock, trading at 35 times earnings; that's far higher than Panera Bread's (Nasdaq: PNRA  ) forward price-to-earnings ratio of 22, and heck, McDonald's and Yum! Brands (NYSE: YUM  ) sport forward P/Es of just 15 and 17, respectively.

Still, I'm often willing to pay a premium for very strong companies that boast great brands and lofty ideals in sustainability and social responsibility. In the long run, I believe these will be the leaders that generate amazing, sustainable growth. Chipotle fits the bill.

If Chipotle just doesn't do it for you as a potential investment, find out about 3 American Companies Set to Dominate the World: Click the link for your free report.

Alyce Lomax owns shares of Whole Foods Market in her personal portfolio. The Motley Fool owns shares of McDonald's, Chipotle Mexican Grill, Whole Foods Market, and Panera Bread. Motley Fool newsletter services have recommended buying shares of Panera Bread, McDonald's, Whole Foods Market, and Chipotle Mexican Grill. Motley Fool newsletter services have recommended creating a bear put spread position in Chipotle Mexican Grill. The Motley Fool has a disclosure policy

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (13) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 10, 2012, at 3:51 PM, EquityBull wrote:

    Chipotle is a little expensive here for sure but they are a long term winner and if ShopHouse is even 1/3 as successful as Chipotle the stock is actually cheap here.

    This is a dangerous game for short sellers or those blowing out simply on valuation hoping to get in cheaper down the road again. Pay the tax man on the way out and hope to get in low enough to make up for that trading friction.

    I just sit and hold and if the stock ever does sell off I can add to my position. I'm planning on holding Chipotle for decades.

  • Report this Comment On July 10, 2012, at 4:39 PM, bubbler101 wrote:

    Im really growing tired of all the blatant pumps of cmg stock by the FOOL. I am really growing tired of a upbeat blatant cheer everytime CMG has a down day. It is obvious to anyone with half a brain and some basic stock market experience that this stock is severely overvalued, in a saturated market and really just running on fumes. I mean even if they meet or beat estimates IT IS STILL OVERVALUED BY AT LEAST $100 , and that is no exxageration, I used to really respect the FOOl as a legitimate and reliable source of unbiased info, but with each and every pump of this absolute bloated pig , manipulated stock. I lose more and more respect. CMG will be under 300 within a year. NOW THATS SOME SOUND ADVICE.

  • Report this Comment On July 10, 2012, at 4:47 PM, ravens9111 wrote:

    bubbler, I agree with you. I think CMG will test the $300-$315 area within the next few months. I don't think they blow past earnings. So much has been built into the stock, a big disappointing earnings report will send it tumbling. If I owned CMG, which I do not, I would be selling covered Calls to try and limit my downside. If you don't want to cap your gains because you think the stock will go up, then buy some Puts about 6 months out for insurance.

  • Report this Comment On July 10, 2012, at 5:14 PM, mdhovland wrote:

    Decades?

    CMG has been a relative strength outperformer. I'd have liked to been on this ride; I haven't been.

    I've eaten their food and it's good.

    I've also eaten at the Rainforest Cafe (RAIN). It was a good family experience. RAIN was also an outperformer in the late 1990's.

    I tried to get a client who was close to the company out of this name (RAIN). He was enthralled with the concept due to being close to son of an angel who funded the startup. He swapped a ton of GIS for RAIN. He lost money.

    Chipotle is good food and service, but the stock price doesn't warrant it's value.

    Alyce - be FOOLish if you want, but also be forewarned about cognitive dissonance.

    Mark

  • Report this Comment On July 10, 2012, at 5:56 PM, bubbler101 wrote:

    I dont believe cmg willl be a going concern decades from now.

  • Report this Comment On July 11, 2012, at 9:58 AM, assisgnmeaname wrote:

    CMG has outperformed the broader market despite a 7% pullback from all time high. I have been impressed with their customer loyalty and they deserve some premium to other restaurant stocks but Chipotle needs to come in 15-25% to get to a fair valuation that reflects decelerating SSS, higher input costs (food and labor), specter of SEC/INS/DOJ investigations, waning enthusiasm for ShopHouse success, possible saturation of "sweetspot" markets. Alyce, I wish you would consider CMG's record of hiring practices when you label them as especially socially responsible.

  • Report this Comment On July 15, 2012, at 6:51 AM, upndn wrote:

    With respect to hiring practices, CMG is not unusual compared to most any other restaurant chain. Why they have been singled out by ICE, I don't know, maybe there's a Chipotle near their headquarters that they patronize a lot.

    And as for the Fool's constant pumping of CMG, one of the portfolios recently recommended selling half of the position.

    Writers and portfolio advisers for the Fool often have conflicting opinions, and that's cool with the Fool and me.

    JT

  • Report this Comment On July 20, 2012, at 12:17 PM, griderX wrote:

    Nearly $100 haircuut today, what are your thoughts?

  • Report this Comment On July 22, 2012, at 3:33 AM, DJDynamicNC wrote:

    Chipotle is angling for Europe and they'll cream any "Mexican" restaurant currently in existence on the continent, I expect good things.

  • Report this Comment On July 22, 2012, at 12:30 PM, ravens9111 wrote:

    Only a matter of time before CMG breaks below $300. Wait for it to form a base before buying.

  • Report this Comment On July 22, 2012, at 1:53 PM, EvanBuck wrote:

    Good analysis. Check out my thoughts on the topic here:

    http://beta.fool.com/evanbuck/2012/07/20/holy-guacamole-chip...

    (it’s not syndicated yet, but hopefully it will be soon :)

  • Report this Comment On July 23, 2012, at 6:33 PM, ravens9111 wrote:

    WOW even Cramer says to wait to buy at $270. BOOYAH!!!!

  • Report this Comment On July 24, 2012, at 6:00 PM, TMFLomax wrote:

    Thanks for all the thoughts everybody. I would have preferred to have gotten in at the current price (and think it's a great opportunity now), but I am in this one for the long haul so I'm not sweating the short term. Here's my update published today:

    http://www.fool.com/investing/general/2012/07/24/clutching-t...

    Best,

    Alyce

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