I am still in the process of completing my due diligence but i am leaning towards buying puts on CMG and patiently awaiting DEII (dry humor, but David Einhorn II). I feel CMG should be valued more towards $440 on the high end and thus see potential profits from a pull back. Having said this, the real issue (and what an enigma it is) is of course timing. So I open the floor to everyone and their barber uncles as to strike prices, dates and the works.
Can you explain your rationale for valuation? To short this stock you need to have a really clear picture of what would put a dent in this growth story. Even with slowing comps that Einhorn points to, the bull thesis is that there’s still a huge runway for new store openings and supply chain improvements. These guys have basically been category killers and when I hear people that have been shorting CMG since it was $250 still say they are “adding to their position on strength,” I just shake my head because they simply don’t get the business model.
I’ll email you what I compiled yesterday during lunch. Provided, it’s fairly simplistic but this is the approach I tend to take in my investments. I emailed LX and he made some good points that I am researching but I would appreciate your feedback too.
i agree with numi. i think many internet stocks are far more overvalued than CMG considering CMG’s growth runway. yes, CMG is expensive but outside of the U.S., they basically have zero stores. in valuing CMG, i’d take their P/E and immediately cut it in half just to bring in the international growth opps. then i’d start to look at organic growth.
^So you think 100x +organic growth is a resonable mutliple? I would be untrue to myself if i didnt see the sensibility in that argument however I think their business model is so simple that it should invite competitors and drastically eat into their margins. Perhaps I am naive, but they are producing burritos with meat and rice, it’s not exactly a revolutionary idea or something that cannot be replicated.
I do appreciate the comments bc i havent pulled the trigger yet and it’s always helpful to see as many angles as possible.
^ I would say this is a naive argument, because it totally ignores other important things such as brand, scale, and quality differentiation that are equally important to the CMG growth story in particular and to competitive advantages in general. Pure value investors never really understand this fact: just because a company is trading expensive on current earnings doesn’t mean it isn’t actually cheap on future earnings.
Thanks as well for your e-mail. I’ll respond once I have some time to review. My advice to you: short CMG (or DDD) at your own risk. Shareholder base won’t turn over until there is a major stall in the growth story, and until you can point out what that is, it doesn’t matter if the company is trading at 40x, 100x, 500x current earnings. The bulls on the name already have said they do not care about current earnings because the future is rosy. If your view is that it isn’t, then you need to prove it before shorting it. You prove this by pointing to FACTS about the BUSINESS, not multiples.
Shorting momentum stocks is a dangeous idea. Ask anybody who thought TSLA was over valued at $70 or AMZN at any point in the last 3 years. It looked overvalued at pretty much any conventional measure but that doesn’t stop it from powering higher.
And yes, they have a simple idea. But what they have that others don’t is the hippie and yuppie following of high quality, “healthy” but actually calorie filled, at a decent price. When I was traveling for work or whatever, its not often you can get a decent quality and really filling meal for $7 no matter where you are. There’s value to that consistency and brand.
finding the actual inflection point is probably too difficult. u can fool urself into thinking that u’ve found it too easily.
i’d honestly just bite some return and look at momentum to give a clue. when growth stalls and the shareholder base turns over it takes a long time of ugliness before things go well again.
All solid advice. I was one of the biggest advocates of Elon but at $70 i was saying it was a bit overdone…Maybe i should look into momentum stocks and practice buy high sell higher but the contrarian play has always appealed to me.
$11.5M in equity value per store location. Hmm…
I know nothing of the company or brand otherwise, but that price indicates insane brand value (way beyond McD’s, for example) or massive expansion potential (does anyone eat that kind of junk outside of the US).
What’s the bull story here?
I’m not a practicioner of momentum if I have truly done the work and know where the inflection point is. The only problem is that with such a well known stock such as CMG are you truly smart/arrogant enough to say that you have identified that point of slowdown which is still unknown? What is your edge here?
I think the math also works out in your favor here. Suppose it’s currently trading at $100, you buy at $80, and expect it to go to $40. With buying it at $100 you make 60% but at $80 you make 50% so you’re only really giving up 10% of return here to be right a much higher percent of the time.
On the long side though, if you thought it was worth $100 and buy it at $40 instead of $50, that’s the difference in 150% return versus 100% for just a 20% difference in purchase price.
^ The bull story?? Stock is up 110% YTD and the bull story, aside from being completely present in the stock chart, is easily attainable anywhere you look: transcripts, management presentations, sell-side research, SeekingAlpha, YouTube, Madagascar, Antarctica, outer space, everywhere.
Anyway, not trying to be impertinent but this is some serious low-hanging fruit, and it’s only standard etiquette to do some modicum of preparation for an investment discussion
My edge? I think i may need to preface that I am not a believer in market efficiency and therefore any investment i make, I will always assume there is a disconnect between its value and intrinsic value. Academia aside, I think the growth story is overrated and the company’s product will soon fall out of flavor (i mean favor). Yes, new stores are opening at a burgeoning rate and they seem to have a loyal fan base. Having said that, they produce chicken, rice, and vegis and put that into a burrito for 7-10 dollars. I know i am being simplistic and leaving out many variables, but from this most basic point, it’s safe to assume their market dominance can easily be divided to comptitors or, as i think, people will soon move to the next fad of food - maybe brazillian steak for all i know.
I also view it from the perspective of a franchisee. If i was going to invest in a chain, would i be willing to spend 50x last years earnings? Now, i understand there are huge differences between the two with respect to career earnings and growth potential, but nevertheless, it’s a burrito!
Maybe sell puts at what you think a sensible price would be. Collect a little premium and then buy it at a bargain price if you ever get exercised on those puts.
BTW, is the non-OP’s consensus that CMG is a buy, or is it just that it is not a good short and that one should wait for a technical indicator or catalyst to do anything on the short side here?
One key consideration is that they removed bacon from their pinto bean recipe for 4Q2013, which could impact bean sales. Also, I had a terrible first meal at the Rehobeth Beach CMG several months ago and will not be returning. Using a mosaic approach to combine these two pertinent points with the fact that CMG is also an acronym for a medical test to assess how your bladder and sphincter behave while you store urine and when you pass urine and I think CMG is a clear short.
You can’t short without giving a reason for why it should be down in 6 months. This implies needing a reason for “why now”.
^ LOL
I don’t really know too much about this stock, but the concern with any rapid growth consumer stock is that it is priced for perfection. Any slowing growth or guidance could impact the price quite severely. At some point growth rates cannot be supported by continuing to open new stores, so they begin to slow. Key considerations:
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How saturated is the market for CMG’s product now? Are there still lines out the door when a new store opens?
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What level of food inflation are they able to pass on to their customers?
If somebody put a gun to my head and forced me to buy puts or calls one year out from right now, I would buy puts.
I hate it when people do that!