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
|CAPS stars (out of 5)||**|
|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
|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|
|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
California Pizza Kitchen
Red Robin Gourmet Burgers
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
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.
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