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Is Chipotle Really a Good Short?

Last Thursday, shares of fast-casual restaurant operator Chipotle Mexican Grill (NYSE: CMG  ) fell nearly 3% after DoubleLine Capital CIO Jeffrey Gundlach called the stock a "good short," joking at the time that "'Gourmet burrito' is an oxymoron."

So, with Chipotle set to announce earnings tomorrow, why were investors so concerned about the opinion of one analyst?

Maybe it's his past record, considering this is the same Gundlach who disclosed his decision to short Apple a year ago at $610 per share while correctly predicting its shares would eventually fall to around $425.

Of course, looking at Chipotle's performance lately, you can't blame investors for taking some profit; the stock has been on a tear since touching its 52-week low last October:

CMG Chart

CMG data by YCharts.

Even so, this is hardly guarantees Chipotle's stock will suffer a similar fate going forward as Cupertino has, especially when we remember it's still down more than 22% over the past year.

More important to truly Foolish investors, however, is to consider how Chipotle's business will fare over the long term. Check out what the stock has done for investors since its IPO after being spun off from McDonald's in 2006:

 CMG Chart

CMG data by YCharts.

Why does this matter? Because it effectively illustrates the kind of returns Chipotle can offer by maintaining patience over the long term. After all, looking at the chart above, you can see this isn't the first time shares of Chipotle have suffered short-term setbacks, and there's much to be said for not worrying about "overpriced" stocks when their underlying businesses are truly great.

Is Chipotle overpriced?
In short: Not necessarily. While analysts like Gundlach have said its current price-to-earnings ratio of 38.6 looks rich, that's not considerably higher than Chipotle's five-year average of 37.2 -- a period during which the stock has tripled and the company has enjoyed steady, profitable expansion.

Additionally, even in the face of higher food costs and opening 183 new locations in 2012, Chipotle management has every intention of continuing that expansion with their plans to open between 165 and 180 new locations in 2013. For those of you keeping track, that's an increase of between 11.7% and 12.8% over the 1,410 locations it operated at the end of last year.

Even so, investors have remained frustrated by Chipotle's refusal to either open stores at a faster pace or raise prices to improve tepid same-store sales growth, which came in at just 3.8% last quarter. That's shy of competing healthy eateries, including Panera Bread (NASDAQ: PNRA  ) which recently said its same-store growth came in at an impressive 5.1% last quarter. Even still, by not immediately raising prices, Chipotle is intelligently building customer goodwill, and remains open to the possibility of raising prices as economic conditions improve.

In the meantime, the company is focused on improving its efficiency and foot traffic. If and when Chipotle does finally decide to raise prices to offset its increasing costs, the company will prove a leaner, stronger operation with an even more loyal customer base -- an advantage which cannot be overstated as it faces fantastic competitors like Panera.

Foolish final thoughts
When Chipotle announces tomorrow, it's anyone's best guess which direction the results will send its shares in. In the end, if that direction happens to be downward, I still won't be particularly concerned, as it'll simply represent a better entry point for patient long-term investors to either open or add to their positions in this great company.

Let the bears take their short-term profits if they can; over the long-term, it's the bulls who are set to enjoy truly substantial gains with Chipotle.

More expert advice from The Motley Fool
Chipotle's stock has been on an absolute tear since the company went public in 2006. Unfortunately, 2012 wasn't kind to Chipotle's stock, as investors question whether its growth has come to an end. Fool analyst Jason Moser's 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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CMG $413.81 Up +3.65 +0.89%
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