Is Chipotle the Next Starbucks?

One of the great maxims of traders and Wall Street pros is to follow the "smart money."

I'm not much for the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

Next up: Chipotle Mexican Grill (NYSE: CMG  ) . Are institutions bullish or bearish when it comes to this quick-serve burrito baron?

Foolish facts

Metric

Chipotle

CAPS stars (out of 5) **
Total ratings 2,541
Percent bulls 87.6%
Percent bears 12.4%
Bullish pitches 384 out of 467
Highest rated peers Kona Grill, Country Style Cooking, Dreams Inc.

Data current as of Nov. 27.

In the Beyers family, we know Chipotle well. Its restaurants are one of the few places serving safe quick-serve items for our food-allergic son, and the stock has been a huge winner for our portfolio, tripling over the past two and a half years. The run-up has more than a few Fools wondering if it's time to sell.

"Mr. Market has gotten a case of the munchies with this stock. The inevitable hangover will bring it back to reality. Good long term potential but not at this price," wrote Foolish investor comansense in explaining a recent short call in CAPS.

Fair point. There's no measure by which Chipotle shares look cheap. The stock trades for close to 50 times earnings, the richest multiple we've seen since March 2008, back before the recession torpedoed this and so many other stocks:

Institutional ownership history

Top Owners

2007*

2008*

2009*

Latest*

Fidelity Investments 2,737,950 4,112,365 3,105,982 4,074,417
T. Rowe Price Group 1,987,700 3,034,450 6,189,704 3,365,399
Capital Research and Management 4,031,030 4,204,527 2,510,732 2,585,732
BlackRock 158,630 75,680 1,556,725 1,492,287
The Vanguard Group 1,015,936 1,063,445 1,312,602 1,153,790
TOP 25 TOTAL 17,975,786 18,779,199 21,871,624 21,330,289

Source: Capital IQ, a division of Standard & Poor's. *Indicates the number of shares owned.

On the other hand, there's no denying Chipotle's extraordinary fundamental performance. Revenue is up almost 18% over the trailing 12 months. Normalized net profit is up more than 40% over the same period. Gross margin and returns on capital are rising.

All this and more points to a business that's executing extremely well, which may explain why Big Money investors have added to their positions on an annualized basis, despite legitimate valuation concerns.

Yet those concerns could also explain why recent institutional buying has been inconsistent. According to the quarterly numbers, the top 25 took some profit in the first half of the year, only to begin buying anew in September. They've purchased roughly 1 million more shares since.

Competitor and peer checkup

Company

Institutional Ownership

Insider Ownership

California Pizza Kitchen (Nasdaq: CPKI  ) 94.21% 9.21%
Chipotle 102.94% 1.89%
Red Robin Gourmet Burgers (Nasdaq: RRGB  ) 87.95% 9.67%
Yum! Brands (NYSE: YUM  ) 77.09% 0.44%

Source: Capital IQ. Data current as of Nov. 27.

As an owner, I'd love to see institutions keep buying. Yet that may be wishful thinking. Big Money investors already own more than 100% of the shares outstanding because of the effects of borrowing shares for shorting. Approximately 11% were sold short as of this writing.

Yet I can't see selling at current prices. Yes, Chipotle is overvalued by the numbers. Yes, institutional sponsorship is about as high as it's going to get. Yes, I realize we're talking about a burrito maker. Trouble is, investors made similar arguments against Starbucks (Nasdaq: SBUX  ) years ago, and it went on to become a megachain. Something similar may be happening here. I'm willing to hold and find out.

Now it's your turn to weigh in. Do you think the institutions are wrong about Chipotle? Let us know what you think using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.

Interested in more info on Chipotle? Add it to your watchlist.

Both our Motley Fool Rule Breakers and Motley Fool Hidden Gems services have recommended subscribers buy shares of Chipotle. Country Style Cooking is also a Rule Breakers recommendation. Starbucks is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He owned shares of Chipotle at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Yum! Brands and is also on Twitter as @TheMotleyFool. Its disclosure policy is smarter than the average bear.


Read/Post Comments (4) | Recommend This Article (8)

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 November 29, 2010, at 12:54 PM, naandrews wrote:

    Wouldn't a comparison to McDonald's be more relevant than a comparison to Starbucks?

    If so, my question is, can Chipotle become as big as McDonalds -- is the market for burritos as big as for hamburgers and French Fries?

  • Report this Comment On November 29, 2010, at 7:10 PM, goalie37 wrote:

    With the valuation, two things are possible. Either the price goes down, creating a more rational multiple, or the earnings go up, creating a more rational multiple. In either case, there is nothing wrong with waiting. Even if the company does great over the next several years, the chance that it will continue to trade at 50x is very doubtful.

  • Report this Comment On November 29, 2010, at 11:03 PM, TMFBoiseKen wrote:

    I think we will see earnings continue to explode for the next couple years.

    The thing I worry about is what will be the next move for Chipotle. Using the sbux analogy -- When sbux found its profit drying up, they have other levers -- fancy different coffee, breakfast like oatmeal, and VIA.

    How does Chipotle find extra gear one the growth days are over?

    The luxury for me is that I think the growth is a given. I just am trying to envision the moves a mature Chipotle makes ...

  • Report this Comment On November 30, 2010, at 1:12 AM, jprowlandtx wrote:

    If we want to compare it to Starbucks or Mcdonald's, just look at the number of franchises. Starbucks is running around 17,000 locations worldwide, and Mcdonald's around 31,000. Chipotle in comparison has a mere 1,000. Is there as big a market? Not even close, but if you consider that the other two big chains are close to saturation, Chipotle still has a lot of room to grow. My (albeit somewhat wild) guess is that they could easily support around 4,000 locations in the U.S. and Canada and another 500 worldwide, probably maxing out in about 10-12 years. Even without considering their recent interest in pursuing Asian cuisine, there's still a lot of elbow room for growth where the other two chains are stretching to find new outlets and improve same-store sales.

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