For the first two years, I felt good about my thesis: Chipotle largely underperformed. But since New Year's 2019, the stock has more than doubled -- far outpacing the market.
The company reported fourth quarter earnings this week. Chipotle's comparable store sales were up 13.4% -- a breath-taking amount in the current restaurant environment. That's enough for me to throw in the towel. John, you win.
Let's see why that happened and -- just as important -- why it's okay to lose "bets" like this.
Why so bearish?
While I was still a fan of Chipotle-the-restaurant, the stock no longer fit within my investing framework. It all boiled down to a few simple concepts that I thought made the company long-term fragile:
- Narrow moat: Any restaurant is only as powerful as its brand. Moats are incredibly narrow because anyone can open up -- in this case -- a burrito joint. The food poisoning outbreak of 2016 was tarnishing the brand.
- No optionality: "Optionality" is another way of saying a company has multiple ways to fulfill its mission. Chipotle tried the "food with integrity" shtick with pizza, Asian fusion, and burger joints. None of them moved the needle.
- Fragile: Any food-related illness could hurt a restaurant. But given the black eye Chipotle had in 2016, if another incident surfaced, it could have been a death blow. That's a serious risk.
- Expensive stock: Even after its precipitous fall, Chipotle's stock traded for 52 times trailing earnings, and 99 times trailing free cash flow.
Given these factors, I sold my shares as soon as trading rules allowed.
A major resurgence
In the restaurant world, there's no metric more important than comparable-store sales, or comps. This tells us how much more (or less) business existing stores produce year after year. By factoring out the effect of new stores, we can see if a restaurant is really popular, or just making it look that way by building lots of new locations.
In general, any restaurant that can keep comps above the rate of inflation is keeping its head above water. As you can see below, Chipotle has been on a steady -- and increasingly torrid -- trend.
This isn't normal. Usually, companies the size of Chipotle start seeing comps slow down over time. It makes sense: The more success you have, the harder it is to accelerate growth over the long run.
But that's just what Chipotle has done, thanks in large part to a wildly successful online ordering system.
Don't lose sleep over stuff like this!
Alas, we can't always pick the winners. But here's the great part about investing: It's just fine if you sell a stock that goes on to be a winner.
Being a "successful investor" -- whatever that might mean to you -- doesn't mean picking every winning stock. If you focus on every one-that-got-away, you're headed for a world of misery -- no matter how good your returns look. It only takes one or two successful investments, held for the long term, to satisfy the real needs of most investors.
At the end of the day, investing needs to serve you -- not the other way around. I was crystal clear about why I didn't like the stock. The fact that my thesis hasn't panned out has provided an opportunity to learn: Just because I deem something "fragile" doesn't mean it will "break" any time soon. And with each passing day (and the fading memories of food-borne illnesses), that fragility lessens. But I couldn't have known that back then.
Most importantly -- I didn't lose any sleep over my decision. Chipotle wasn't the first stock I sold that went on to be successful. It certainly won't be the last. And that's okay.
John, if you're reading this, I owe you a beer.