One way individual investors can find lucrative ideas is by following smart investment managers and note what stocks they own in their portfolios. Take Bill Ackman, the billionaire hedge fund manager of Pershing Square Capital Management. He runs a very concentrated book that focuses on what he believes are high-quality businesses with a long-term mindset.

Chipotle Mexican Grill (CMG 2.41%) is one of Ackman's top holdings, representing 18.2% of the portfolio as of Dec. 31. Ackman's firm has owned the restaurant stock since the third quarter of 2016 at an initial cost basis of about $411 per share. From that price point, shares are up a whopping 545%.

Let's take a closer look at Chipotle's thriving business. Investors can then decide if the stock is a smart buy right now.

A comeback story

In the last five years, Chipotle's revenue and diluted earnings per share have climbed at compound annual rates of 15.2% and 47.7%, respectively. These strong fundamental gains were undoubtedly the key ingredient for the stock's impressive run.

The company performed extremely well during the COVID-19 pandemic. It leaned on its strong digital foundation and drive-through locations to serve hungry customers. And even in the last couple of years, a period of economic uncertainty, inflationary pressures, and recessionary fears, Chipotle continues posting stellar financial results.

In 2023's fourth quarter, the business reported an 8.4% year-over-year, same-store sales jump driven by a 7.4% increase in transaction counts. This indicates that traffic isn't letting up, and that consumers find tremendous value in Chipotle's offering.

However, the business wasn't always firing on all cylinders like it is now. When Ackman first purchased shares more than seven years ago, Chipotle was dealing with the fallout from the E. coli scare, which resulted in falling sales, waning trust, and a tarnished reputation. The famed hedge fund manager was greedy when others were fearful, as the great Warren Buffett emphasizes.

Lofty expectations

Investors looking to follow in Bill Ackman's footsteps and take a big bite out of Chipotle stock right now are better off waiting patiently for a more attractive entry price. The market is fully aware of how wonderful this business is. On a forward basis, the current price-to-earnings ratio is about 50. That implies truly huge expectations for the company.

As a restaurant operator, Chipotle might be the furthest thing from the ongoing artificial intelligence boom, but it certainly has a lot of growth potential. This is likely what investors are most focused on, which is why shares are expensive.

There are currently 3,437 Chipotle locations that generate an average of $3 million in annual unit volume (AUV). Management believes there could be 7,000 stores open in North America one day that rake in $4 million of AUV. That means the long-term potential is to produce $28 billion in revenue, compared to 2023 sales of $9.9 billion.

The leadership team had originally targeted 6,000 stores as the ultimate goal. But seeing how well the restaurants were performing, they upped their outlook. It's totally in the realm of possibilities that at some point in the future, they will raise the target again. However, that's unpredictable, as we can't read the CEO's mind.

It's worth pointing out the 7,000 stores target doesn't include restaurants outside of North America. If Chipotle finds success in other parts of the world, there is even more upside. Based on the current valuation, though, I think this optimism is more than fully reflected in the stock price.