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The 1 Ingredient Driving Chipotle (CMG) Stock’s Huge Gains

Last Updated September 23, 2020 1:13 PM
Nicolas Chahine
Last Updated September 23, 2020 1:13 PM

Chipotle (NYSE:CMG) stock is once again a star on Wall Street. It is up more than 80% year-to-date and this is even after a 7% dip from its earnings report this week.

CMG Stock Update

CMG is a stock that has a complicated history with Wall Street traders. Before the Fall of 2015 it was a shining star and can do no wrong. But then the love fest ended abruptly as headlines of sicknesses broke out. The stock crashed 60% as a result. Now after four years, investors have forgiven Chipotle and CMG stock has regained past glory.

Chipotle stock performance
CMG stock is under pressure from earnings but it still is a star year-to-date. It currently trades around $787. | Chart: Tradingview.com

The CMG Secret Sauce

This is not a cheap stock. It sells at a 98 price-to-earnings ratio, which is more expensive than Amazon (NASDAQ:AMZN). But CMG also sells at only 4.5 times sales. And therein lies the one ace up the CMG stock sleeve: Sales growth. As long as management continues to deliver double digit comparable sales, investors will turn the blind eye on the high P/E valuation. Comparable sales went from zero in 2017 to over 11% this quarter.

Value is in the eye of the beholder. Not all companies should be judged by the same metrics. When investors evaluate a growth stock, emphasis falls on top-line metrics, not profitability. AMZN laid the perfect map for this. Under new leadership, CMG has performed brilliantly on that front and it doesn’t look like it will fade any time soon. So CMG stock will continue to be an enticing short for skeptics, but one that will be difficult to beat.

Part of the CMG growth strategy is to evolve with the times. Management is adding relevant products to fit new tastes. During the earnings call, CEO Brian Niccol declared that digital sales almost doubled and now account for almost 20% of revenues.

CMG management has also announced aggressive expansion plans as a way to boost comparable sales. The new CEO is clearly getting results, so the expansion efforts have received Wall Street’s blessings. Success begets success and this earns CMG trust among investors. CMG now has the benefit of the doubt, so the stock will likely have a significant tailwind in the near term.