2012: The Year Chipotle Went Bad

One of the more fascinating developments of 2012 was how shares of Chipotle Mexican Grill  (NYSE: CMG  )  suddenly spoiled completely for so many investors. The stock remains well off its high of $442 per share after bearishness cast a cold chill on the burrito maker's share price.

However, as 2012 draws to a close, the question savvy investors should ask is: Are things really that bad for Chipotle?

Spoilers
As 2012 wore on, slower foot traffic than investors were accustomed to resulted in many casting away their Chipotle shares. Meanwhile, noted short-seller David Einhorn added a spice called "pessimism" into the salsa when he claimed Yum! Brands' (NYSE: YUM  ) Taco Bell is stealing Chipotle's customers.

Of course, many investors allow themselves to formulate theories and forget about the real world. The major differences between the demographics and business styles of these two Mexican-themed companies point to that argument's major disconnect from reality.

Meanwhile, Chipotle's growth has remained impressive. Last quarter, its weaker sales outlook for next year and word that it will raise menu prices sent another chill over Chipotle. Still, the reality looked better than the market's perception: Chipotle's profit increased 20% as sales jumped 18%, and same-store sales increased "only" 4.8%. For many restaurant companies, those are downright enviable numbers.

As for raising prices, many companies will likely be forced to do so in the wake of the 2012 drought. Economic weakness is yet another challenge all quick-serve restaurants have had to face as well.

In other words, Chipotle isn't alone in having been working its way through a challenging environment. McDonald's (NYSE: MCD  ) has been yet another fast-food company that lost years worth of positive momentum and investor bullishness with a relatively bland 2012, although its recent surprisingly good monthly sales report gave some investors reason to get happy.

In both Chipotle's and McDonald's cases, part of the problem is probably that investors had gotten so accustomed to incredible performance that anything less seemed like the end of the world to the skittish, fickle traders of our marketplace.

Wait... maybe 2012 was actually a good year (for a bargain)
Companies with beaten-down stock prices are often major value traps, but that's not the case for Chipotle. After all, despite all the negative noise, nothing has really fundamentally changed here.

Chipotle has plenty going for it, such as its Food With Integrity mission -- which focuses on using sustainable, organic, and local suppliers as much as possible -- an initiative that continues to differentiate it from rivals like Taco Bell.

The company's plans to cautiously expand its ShopHouse Southeast Asian Kitchen concept give heartening reasons to believe the company will experiment its way into new, healthy growth channels in the future, too.

The situation reminds me a bit of Starbucks' (NASDAQ: SBUX  ) worst times in 2008, when many investors had seriously left it for dead. It became completely legitimate to buck the prevailing psychology and ask: Is the brand really broken? As it turns out, the answer was most definitely no.

In 2012, I added Chipotle to my socially responsible Prosocial Portfolio for Fool.com not once but twice, and bought some Chipotle shares for my personal portfolio as well. Obviously, I'm thinking that over the long term, Chipotle's still a great stock to own. Although it still trades at 27 times forward earnings, which sounds pricey, its PEG ratio of 1.46 is reasonable, especially given expectations that it can outperform conservative estimates in the future.

I'm sure we'll revisit the situation over the years, but I have a funny feeling time will tell that in reality, 2012 wasn't really the year Chipotle spoiled. It'll turn out that it was actually the year investors had a tasty opportunity to buy into a great company at discounted prices. No spoilage here, folks.

Chipotle's stock has been on an absolute tear since the company went public in 2006. Unfortunately, 2012 hasn't been kind to the stock, as investors question whether its growth has come to an end. Fool analyst Jason Moser's new premium research report analyzes the burrito maker's situation and answers the question investors are asking: Can Chipotle still grow? If you own or are considering owning shares in Chipotle, you'll want to click here now and get started! 


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  • Report this Comment On December 20, 2012, at 1:00 PM, lucasmonger wrote:

    Have you tasted the Taco Bell Cantina Burrito? Chipotle has nothing to worry about. Although the Cantina tastes better than the regular Taco Bell burritos, Taco Bell cannot match Chipotle's made-to-order with exactly what you want burritos, tacos, salads, and bowls.

    Since the Chipotle business appears to be sound, I view this drop in price as an absolute great time to buy. Chipotle has a lot of room to grow, and they are growing carefully so as not to put one on every corner like Starbucks did.

    Great food, great company, now if they can only open up some Shop Houses in my area...

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