Chipotle Mexican Grill was one of our top 5 stocks for 2020. Then the lockdown happened and it really got creamed. The cream does rise to the top though.
People tend to be afraid of stocks that are performing very well, and especially with those performing extremely well like Chipotle. This stock grew by 289% in 2018 and 2019, and moving that far would have a lot of people worried. This is the sort of thing that gets us liking a stock more though, and this performance combined with the way it ended 2019 strong with a new high to close out the year is how it earned its way into our list.
It really doesn’t need to be any more complicated than this, and thinking that it is more complicated is what leads so many people so far astray. We didn’t even bother looking into the matter anymore than this, and the idea behind these picks is to select hot stocks based solely on their heat level and show how well these things do just based upon that.
We already knew that the market was very bullish on Chipotle based upon its performance. The demand for the stock was very high in other words and that means that they see the future of Chipotle as being pretty bright. This does not mean that it will continue to do so, but we’d certainly prefer to go with a stock that the market really likes right now over one that it likes less and especially doesn’t like at all.
Many instead look to choose disliked stocks in the hope that we’ll start liking them more. A stock changing direction like this needs some reason behind it, and this is not to say that some of these stocks don’t go from bad to good compared to other stocks, but most do not. It takes some sort of change to produce this, and when you bet on something that needs work and it isn’t getting any help right now, you at least need to wait until things do turn around enough to make it appealing again, otherwise you’re just going to be stuck in a bad bet while you are waiting.
Things do not change by themselves or by magic, and when the market is telling us that it isn’t that fond of a stock’s prospects, represented by a lack of positive momentum, something needs to take them from being out of favor to being in favor. This is only sensible, and it’s certainly not sensible at all to think that disliked stocks become liked enough without something producing this, or that we should just embrace this ugliness and sit back and hope without sufficient reason for events not probable enough to become profitable without and pay the price for this mistake.
While these picks were designed to do well in the bull market that was foreseen at the time, this plan got dashed by the lockdown of course, as did all stock ideas on the long side. Many might think that our going with stocks so “overpriced,” so bloated in their minds and prone to getting their blocks really knocked off if a bear market comes would alarm them enough, but given that Chipotle is in the restaurant business, that would really have their eyes bugging out.
If we told you back then that we knew for sure that we would soon get a 35% market pullback where we closed everything down the way we did, and restaurants would get particularly clobbered, and Chipotle would lose half its value in just a month, and you couldn’t sell it and had to commit to hanging on to it through this, would you want it? Would you prefer a seemingly safer bet like the S&P 500 instead, or even to be sitting all in cash knowing this?
We don’t want this to be about timing even though you could have done much better simply by running for your life when the stock market started to crash, with all stocks and especially a restaurant stock like this. Chipotle did take a bigger hit than your average stock because of the sort of stock that it is, among those that were particularly hurt by this bear who was locked out of the restaurants like their customers were and then broke in and trashed the place.
However, you didn’t even need to do this if you didn’t want to, and these plays were designed for the utmost of simplicity where we weren’t going to be there to hold your hand and help you time trades, where even a child could have managed this trade by just buying it and holding it for the year.
We did advise a 10% stop to sidestep any real ugliness that came, after which you could have gotten back in when the smoke cleared and the panic ended and done much better than just holding it, but the re-entry does require a bit of skill and we want to look at this in a way that is truly skill-free now to see how that would have done, taking the ugliest path of grinning and bearing losing half your money at a time and seeing where this leads.
At the same time though, we’re not sure how anyone could manage to do something like this, at the time this happened and with the air so thick with panic, how they could have held any stock through this intense pain without wanting to pull the trigger. This one was truly like walking on a bed of nails, but many investors somehow manage to do these things without that much trouble, and do end up still in stocks when they fall this much, waiting for the bleeding to stop and the stock to start to heal.
Great Stocks Heal a Lot Faster from Bear Attacks
What stands out with the best stocks though is their amazing ability to heal, which we have pointed out with several good stocks, and Chipotle is clearly one of them. Chipotle’s move was a V of epic proportions, going down by half in a month and then gaining it all back in another month. It hasn’t stopped there and is still going.
Hot stocks love the good times, and when the good times start to roll again, they really wake up and show their superiority. Through all this, Chipotle is not down on the year like most stocks, it is up 23%. The fact that it is in an industry that has simply gotten hammered, with their business taking a huge hit as well, puts a huge exclamation mark on this.
Our top 5 picks for 2020 are all are up for the year, by an average of 10%, not too shabby for a year that the market is struggling to get even again. This really is no great feat, as the Nasdaq itself is up by 10% as well, but we have at least kept up with it, something not a lot of people can boast about, these days or ever. The S&P 500 just got even for the year, the index where most index investors have their money, and we have well beaten that.
Chipotle is leading the way, and in spite of its price to earnings ratio growing to 88 now, it is set to go even higher, but this extremely high P/E hasn’t scared off all the analysts, at least the ones that understand that stock prices are really all about the future and not the present.
Chipotle Mexican Grill has fared better than its competitors during the COVID-19 crisis, where take-out has been the order of the day, but this once again isn’t about any of this stuff. If we want to know how fast our car is travelling, we can ponder what may be going on under the hood or we can just look at the speedometer. Stock prices are our speedometer, and Chipotle continues to race down the stock highway.
The 88 on the price to earnings gauge is not indicative of the engine running too hot as so many people believe, as this gauge is more like an RPM indicator than an oil temperature gauge. This engine is turning over faster and that’s really how it got to be travelling as fast as it is.
Given that the great majority of people worry when this gets over 20, become very concerned at 25, and alarmed when it hits 30, just imagine how they must feel when it gets to 88 or to the 124 that AMD, one of our other top picks, is registering at. High ratios here indicate bullishness, not bearishness, but investors get just about everything backward, and this is the biggest one they misunderstand.
As long as the price is moving our way, we don’t even need to concern ourselves with how much a company may be making now, the earnings part of this equation, because that’s not a particularly influential factor anyway and is already included in the price along with everything else. This more holistic view of stocks will get you much further than sweating out the nitty gritty fundamentals that so many like to do and end up with a distorted picture of the future because this isn’t even focused on it.
Stock Prices Are Not About the Present, They Value the Future of Companies
The present with stock prices portrays the future. The reason why we pay more than they are presently worth based upon their current earnings for stocks is not all about the now, it is because the market thinks a stock will be more valuable later. They really like Chipotle and that alone is plenty enough, and the only thing that really matters actually.
Where people really get confused when looking at strong stocks like this is that they think that the present performance of a business places a ceiling on its future outlook, where as we approach and break through that ceiling, these stocks become deemed “overpriced.” There is no ceiling though other than how much people are willing to pay for a stock, and the present circumstances of the company do not limit things unless the people want it to.
The increased momentum that we see nowadays is at least serving to have investors pay less attention to this false ceiling, where we see a stock like Chipotle or AMD or any high flyer over the last couple of years grow at even faster rates than stocks have done historically, and while this relative present valuation, which people simply call valuation as if this was the way that stocks should be valued may give them pause, the temptation to ride up stocks so much often is too tempting.
You would think that the performance of stocks that are losing money and therefore have infinitely high valuations would allow people to get a better grasp of how this works, and some of these stocks are the hottest you’ll ever see. If you just refuse to learn though and just stick to your guns, you’ll remain stuck with your confusion forever, but we’re seeing these myths start to fade among the rank and file at least, making the whole thing work even better with less people afraid to jump on these fast moving trains.
Amateurs have been paying less attention to these things than the “pros” do, and these pros pay attention to all sorts of other things that are unnecessary and irrelevant to the task at hand, although the light does break through sometimes in their world as well, illuminating the path more for and leading to some daring to recommend Chipotle in spite of what they would normally understand as absurdly overpriced with their 88 P/E.
These picks for 2020 were designed to fly in the face of all this as much as possible, picking the most overvalued stocks we could find for our basket, to show that these are pretty good stocks in spite of what a lot of people think. You never have certainty with stocks and the best you can do is have probabilities on your side as much as possible.
Going with what is working ensures that you will do that because while past performance does not guarantee future results, good past performance has a greater probability of continuing, all things being equal, than poor performance transforming into good performance.
Wedbush analyst Nick Setyan is distinguishing himself from the pack with his not being scared of Chipotle’s high valuation, even though his recommendation still seems to be made in spite of this fear. He’s raised his rating on the stock to outperform, and has a target of $1200, 17% higher than where it is currently trading at.
It sure has been outperforming, and the way that it has rebounded, being up 154% since March 18, when the market bottomed as well, isn’t just outperformance, it’s massive outperformance. We need to keep reminding ourselves that the restaurant business that it is in is just dragging itself off the ground, and while a lot of these stocks are still sick and hoping for a vaccine, Chipotle is taking off like a jet and has well surpassed the all-time high that they were at before this infection hit.
The correct answer to our quiz is that, knowing how much this stock had run up over the last 2 years and knowing that the market will crash and restaurant stocks will get hit particularly hard should not have been seen as a reason to stay away from this stock and buy the S&P 500 instead or even go all to cash. Chipotle has beaten both by over 20% since then and is poised for even more.
Hot stocks don’t always get hotter, but they are more likely to get hotter than the colder ones are. Knowing this one thing alone is like when Grasshopper finally was able to take the pebble from the Master’s hand in the Kung-Fu TV series. Time for you to leave.