While ranking among the most actively traded securities of the day, fast-casual restaurant operator Chipotle Mexican Grill Inc (NYSE:CMG) hasn't had much to cheer about. Since the beginning of the year, CMG stock has slipped 32%, a jarring contrast to the S&P 500, which is up 14% during the same frame. Blame the consumer economy, which has been struggling mightily amid rising costs and tariff-related strains. Still, the red ink may offer an attractive discount.
To be fair, Chipotle represents an awfully intrepid contrarian opportunity. In particular, the financial situation is enough to scare off most conservative investors. In the second quarter, the fast-casual eatery posted earnings that were in line with expectations but delivered sales that missed analysts' consensus target.
What was problematic about the miss was that comparable restaurant sales decreased 4% year-over-year. So, while the overall sales tally increased 3% against the year-ago level, the performance largely stemmed from opening new stores. That's a riskier proposition because it masks underlying weaknesses in established units.
Still, Chipotle arguably commands a defensible business. At the broadest level, the company champions health-oriented product offerings — generally aligning with behavioral shifts among young consumers. When drilling into specific corporate elements, Chipotle has enjoyed strong growth and popularity in digital sales.
Sure, the economy is still challenged and other food icons, such as McDonald's Corp (NYSE:MCD) and Yum! Brands Inc (NYSE:YUM), are underperforming the S&P 500. Even here, though, some evidence — such as lower-than-expected jobless claims — suggests that circumstances aren't as bad as initially thought.
In time, investors could readjust their expectations for CMG stock.
With CMG Stock Down Big, The Bulls Have An Appetizing Opportunity
Although CMG stock may look exceptionally ugly on the charts, it also presents a chance for the market to reevaluate the underlying proposition. Clearly, based on the economic conditions of high inflation and elevated borrowing costs, CMG didn't deserve to be priced above $60 per share. However, with the security in the $40 range, those prior adjustments require a recalculation.
Colloquially speaking, every security has a baseline personality. What makes CMG stock so intriguing, though, is that it's obviously well off from its baseline. Since roughly mid-June 2024, the equity is down about 37%. As such, investors will need to seriously consider whether CMG deserves to be this heavily discounted, especially as certain economic indicators appear to be moving in the positive direction.
Further, traders can look at the matter quantitatively. In the trailing 10 weeks, CMG stock has printed a 4-6-D sequence: four up weeks (defined as the return between Monday's open and Friday's close), six down weeks, with an overall downward trajectory. It's a relatively rare sequence, having only materialized 46 times on a rolling basis since January 2019.
Based on the performance of past analogs, the median price of outcomes associated specifically with the 4-6-D sequence is expected to be choppy relative to CMG's baseline performance (or the aggregate performance of all outcomes in the dataset). However, the key point is that by the November monthly options chain, the "sequential" median price is expected to be above the aggregate median.
Long story short, CMG stock is flashing an asymmetric risk-reward dynamic where the security would be expected to perform better than standard risk modeling would suggest.
A Sensibly Aggressive Wager To Consider
From the market intelligence above, the trade that arguably makes the most sense at this juncture is the 40.00/42.50 bull call spread expiring Nov. 21. This transaction involves buying the $40 call and simultaneously selling the $42.50 call, for a net debit paid of $119 (the most that can be lost in the trade).
Should CMG stock rise through the second-leg strike price ($42.50) at expiration, the maximum profit is $131, a payout of just over 110%. Breakeven comes in at $41.19, which is a realistic threshold given that empirical projections coming off the 4-6-D sequence forecast a median price near $43 by the Nov. 21 expiration date.
Indeed, the most aggressive speculator might consider looking at the 40/45 bull spread expiring on the same options chain. While the second-leg strike price is ambitiously high at $45, the breakeven for this transaction comes in at just under $42. Further, the max payout clocks in at over 151%.
Either way, the overriding argument is that CMG stock might perform better than standard expectations call for due to buy-the-dip sentiments. As such, contrarian traders will want to keep Chipotle on their radar.
The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.
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