Cabot Undervalued Stocks Advisor Special Bulletin

Chipotle? Of E. coli notoriety???

Yes. I am here to tell you that Chipotle Mexican Grill (CMG) is an aggressive growth stock with a strong balance sheet, and that the company’s 2015 E. coli problems have been resolved. (And to allay your fears, please remember, if you like everything about the stock except the prospects of another E. coli outbreak in the future, you can always use a stop-loss order on your shares to potentially capture a large capital gain while limiting your risk.)

Chipotle is a successful, expanding restaurant chain with over 2,200 locations, mostly in the U.S., and mostly serving Mexican food. The company is based in Denver.

Here’s what I immediately noticed when I looked at Chipotle’s earnings per share (EPS) history and prospects. The company had only one down year – 2016 – in a very long string of up years. Both revenue and EPS fell in the aftermath of a big E. coli scandal at Chipotle in 2015.

Lots of companies have scandals or other serious problems – industry downturns, falling oil prices, fires at chemical factories, etc. – but those problems don’t harm companies forever. The folks in corporate management put their heads together and figure out how to resolve the problems and once again put the company on track toward success and profitability; just as you and I would do if we had a job loss, a wayward teenager or a divorce.

Such is the case with Chipotle. Earnings per share were a paltry $0.77 in 2016 (December year-end). The consensus of over 30 Wall Street analysts – people who examine the company under a microscope – is that Chipotle will have EPS of $8.15 and $11.77 in 2017 and 2018. Now that’s an earnings rebound … one that every institutional investor on Wall Street will notice.

The stock has very low price/earnings ratios (P/Es) in relation to its earnings growth rates. It’s not really fair to say “CMG is projected to have 958% earnings growth in 2017, and therefore the 54.1 PE is low in comparison”. Well hello, virtually any P/E is low in comparison to that growth rate! But it’s quite fair to say that CMG’s 2018 P/E of 37.4 is low in comparison to expected 2018 EPS growth of 44.4%. The stock is undervalued.

Here’s something else I love about the company: there’s zero long-term debt. Can you imagine living a life without debt? Imagine all the things you could do with your cash flow! Chipotle is in that same position, with lots of freedom to spend cash flow on anything it chooses: dividends, share repurchases, new retail locations, new hires, an expanding product line, joint ventures and acquisitions. In addition, companies that have rising profits and a lack of debt are very attractive takeover targets.

What I’m telling you is to forget the Chipotle of 2015, and look at the Chipotle of 2017, because that’s exactly what professional investors are going to do.

Let’s look at the price chart.

Two things become apparent. This stock rose aggressively for quite a while, and then it fell in half upon news of the E. coli problems. That bad news is history.

Today, we have a share price that stopped falling right before the November general election, has since stabilized, and appears to have begun its rebound this very week. There is 70% upside as the stock retraces its 2015 high around 750. Nobody has missed their opportunity to capitalize on Chipotle’s share price recovery!

Today I’m adding CMG to the Buy Low Opportunities Portfolio. As the stock rises, it’s going to meet some medium-term price resistance at about 530, which is 20% higher than today’s share price. I’ll keep you apprised on how to proceed as we approach 530, which could happen in 2017, if the broader stock market remains somewhat bullish. Strong Buy.

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Lots of our stocks have been trading sideways, or sitting at the bottom of their trading ranges after recent price corrections. Please note that Vulcan Materials (VMC) in the Growth Portfolio appears to have begun its rebound. Strong Buy.

Check out this news story on Mattel (MAT), which is sure to bring attention to the stock: “Mattel Is Teaming Up With ABC for a New Competition Series to Find Its Next Big Toy”. MAT is sitting at price support, and does not yet appear ready to rise. Buy.

Yesterday I issued a Special Bulletin on Vertex Pharmaceuticals’ (VRTX) successful Phase III cystic fibrosis drug trial. Today, TheStreet commented on Corbus Pharmaceuticals’ (CRBP) dismal results in a four-month study of its new drug therapy for cystic fibrosis patients. This is good news for Vertex, as it eliminates a competitive threat to its product sales. Buy.