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Is the Drop in Chipotle Mexican Grill Stock a Warning or an Opportunity?

Shares of Chipotle Mexican Grill are down over 3% less than 48 hours after the company delivered a strong earnings report. The bearish sentiment may linger in the short term...

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You're reading Entrepreneur United States, an international franchise of Entrepreneur Media. This story originally appeared on MarketBeat

Chipotle Stock,  long-term value may not be worth the short-term risk 

Shares of Chipotle Mexican Grill (NYSE: CMG) are down over 3% less than 48 hours after the company delivered a strong earnings report. That’s newsworthy in and of itself, but it appears to be an acceleration of a larger trend. CMG stock is down 8% in the last month.  

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Perhaps the earnings report wasn’t as strong as expected, but that’s hard to believe. The company checked off all the boxes. It beat expectations for earnings per share and revenue. Adjusted earnings per share (EPS) came in at $7.02 which beat the consensus estimate by 11% and was 87% higher on a year-over-year (YOY) basis. Quarterly revenue came in at $2 billion which beat analysts’ expectations for $1.93 billion. Revenue was 25% higher YOY.  

Same-store sales increased again. And Chipotle continues to see strong growth in digital sales which came in at $840.4 million. This was an 8.6% YOY increase and is helping, to some extent, at mitigating the understaffed restaurants which is a problem that is not unique to the restaurant chain.  

And Chipotle even managed to open 41 new restaurants in the quarter; 36 of which included a Chipotlane drive-through service.  

So Why is CMG Stock Dropping? 

One place to start is the company’s current stock price which is 171% higher than it was at the onset of the pandemic. And when you consider that at its 52-week high CMG stock was trading 199% higher than in March 2020.  

That’s remarkable growth and not entirely undeserved. Chipotle was one of the few restaurant chains that managed to grow earnings and revenue during the pandemic. And as the recent results show, it is continuing to move forward even as the economy reopens.  

However, at some point, it’s not unreasonable for investors to wonder if the stock is due for a correction? If that’s what explains this selloff than CMG stock may have further to fall. 

Sell the News 

However, the sense that CMG stock may be overvalued leads us to believe that this is a sell-the-news event. Chipotle beating estimates was hardly a surprise. And with the stock trading above $1,900 a share in early September, some investors may have simply felt it was time to take some profits out. 

Of course, it’s always problematic to guess when these selloffs might end. For what it’s worth the stock’s relative strength indicator (RSI) sits at around 41 as of this writing. That doesn’t necessarily mean it’s oversold, but it could mean a bottom is in sight. 

Fear of the Unknown 

There’s another potential reason for the stock’s sharp, post-earnings drop-off. Management expressed confidence in the company’s ability to manage the twin problems that are emerging from a labor shortage along with higher operating costs both in the cost-of-goods sold (COGS) and in shipping costs.  

However, analysts seemed to be questioning management’s forecast. And although the analyst community itself is bullish on CMG stock, retail investors may be pre-emptively deciding that the company’s strong growth may start to decline in the fourth quarter.  

What to Do With CMG Stock? 

As we noted above, analysts are very bullish on CMG stock. Since the earnings report was released 10 analysts have weighed in; eight of those have increased their price targets. And the two analysts that lowered their price targets still have a price that’s significantly higher than the current price. 

That makes sense because none of the obvious reasons for the stock’s drop suggests a fundamental problem with the company’s business model. However, there’s no question that Chipotle has become an expensive buy-the-dips stock. Particularly since it doesn’t pay a regular dividend. The company did issue a special dividend at the end of 2020.  

 I don’t think opening a long position at this time is a good strategy. The bearish sentiment may linger in the short term. However, if you currently own CMG stock, I believe holding is your best strategy as the long-term outlook for the restaurant chain remains bullish.  

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