You can be on Entrepreneur’s cover!

Is Steady, But Slowing Growth a Good Reason to Place a Buy Order on Chipotle Stock? Chipotle Mexican Grill is expected to report solid earnings on July 20. Yet heading into earnings, there is some concern that the growth about slowing...

By Chris Markoch

entrepreneur daily

This story originally appeared on MarketBeat

Depositphotos.com contributor/Depositphotos.com - MarketBeat

Chipotle Mexican Grill (NYSE:CMG) has been one of the unquestioned winners of the last year. One of the original fast casual chains invested in digital technology in the years prior to the pandemic. That meant as restaurants had to rely on carry-out and delivery options, Chipotle was better positioned than most to prevent this disruption from disrupting sales.

That's been evident in the company's revenue numbers which have grown on year-over-year basis for the last three quarters. The company is expected to post a double beat in earnings. The whisper number has the company posting earnings per share of $6.68 which would be 3% higher than the consensus estimate of $6.46. More impressively, that number would be a 67% increase from the same quarter in 2019.

Chipotle is also expected to generate $1.89 billion in revenue which is only slightly higher than the $1.88 billion being forecast. Still, even if the company only hits analysts' targets, it would still be an 8% increase over the prior quarter. And the numbers would represent a 38% increase since the same quarter in 2020.

The Case For Caution

As I noted above, the restaurant chain has posted year-over-year growth in revenue for the last three quarters. That means that, unilike many stocks, it won't get the benefit of relatively easy comps from 2020. Instead, CMG stock bears the privilege of expectations. And that's what investors will be watching carefully.

After spiking higher in the third quarter of 2020, revenue growth was flat from Q3 to Q4 before climbing 8% between Q4 and the first quarter of 2021. In the current quarter, revenue is expected to increase by another 8%. That's certainly not bad, but will it be enough? CMG stock has grown over 33% in the trailing 12 months ending on July 15? And it's currently on pace to match that performance as it's up over 17% in the last six months.

Plus, the company's margins which are among the best in the industry were shrinking a touch. That could affect the company's guidance.

As the S&P Goes, So Goes Chipotle

I'll start with a huge caveat. Correlation does not equal causation. However, CMG stock has been nearly lockstep with the S&P 500 Index in the past year. And at this moment, on July 19, 2021 investors are in a selling mood. And right now, news that the Delta variant of the novel coronavirus is causing some international cities to consider new mitigation efforts is adding fear to a market that has (ahem) trillions of reasons to believe it's overvalued.

Once again, correlation doesn't mean causation. But there's also the axiom that you shouldn't fight the trend. That means that CMG stock may go down as institutional investors take profits and rebalance their portfolios.

The Bottom Line For CMG Stock

CMG stock has been volatile for the past year. Yet every time the stock has dropped it has been a wonderful buy-the-dip opportunity.

However, past performance doesn't guarantee anything. I could understand why some investors might look for the exit door. Markets are not always rational. And if the virus-induced sell-off turns into a full-fledged mania, that would almost certainly be trouble for CMG stock, which is overvalued by many fundamental metrics. Simply put, if short-term growth is your primary concern there may be better options right now.

The question comes down to your investment horizon. If you're a long-term investor, holding your CMG shares, and maybe even making an incremental buy is the move. The stock is up 238% in the last three years, and so far there's no evidence that the company will be facing any of the food safety issues that weighed down the stock in the middle of the last decade. Plus, the company has received several bullish upgrades in the past month that would support taking a bullish position.

Chipotle Mexican Grill is a part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Editor's Pick

Business News

From Tom Brady to Kevin O'Leary – See Who Lost Big in the Wake of the FTX Crypto Collapse

The crash exposed an $8 billion hole in FTX's accounts, leaving investors and customers scrambling to recoup their funds.

Business News

This Highly-Debated Piece of Cinematic History Just Sold For Over $700,000 at Auction

The wood panel from "Titanic" is often mistaken as a door. Either way, he couldn't have fit. (Sorry.)

Fundraising

Avoid These 9 Pitch Deck Mistakes When Asking Others For Money

Crafting an efficient pitch deck requires serious effort, but at least it's not wandering in the dark since certain rules are shaped by decades of relationships between startups and investors.

Business Ideas

63 Small Business Ideas to Start in 2024

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2024.