I’ve Spotted a Technical Breakout That Could Make You a 20% Gain
Denver-based Chipotle Mexican Grill (NYSE: CMG) started as a single restaurant in 1993. Today, it is a burrito mega-chain, with nearly 1,100 restaurants across the United States.
During this time, the company’s stock price has risen almost as spectacularly as its growth in store locations. In 2006, the stock went public at $41.25. Today, the stock trades nearly 630% higher, recently touching an all-time high above $300.
Further, the stock has recently broken out of a highly bullish ascending triangle formation. The technical pattern, combined with the fundamentals, point to much further price appreciation ahead. Traders looking to achieve a 20% gain may want to consider taking a long position in this high momentum stock now — before it completes its next leg higher.
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One of the reasons Americans have been flocking to Chipotle is because its ingredients are fresher and healthier than its fast-food rival, Taco Bell (a subsidiary of YUM Brands (NYSE: YUM)).
Although Chipotle’s locations are limited compared to Taco Bell, the company is rapidly expanding. During the first-quarter of 2011, the company opened 12 new restaurants in the United States. By the end of the upcoming second-quarter, Chipotle is expected to open an additional 140 U.S. stores. Stock market research group Trefis projects Chipotle’s restaurant count could shortly reach 2,100, up from just over 1,000 today. This rapid growth adds up to huge potential increased sales and profits for the stock.
Furthermore, since all of Chipotle’s outlets are company-owned, management hand picks each spot, meaning newly opened outlets are in optimally profitable locations. And in addition to domestic expansion, the company is also looking to break into the European market.
This past June 27 trading week, Chipotle announced — for the first time in three years — it is increasing menu prices at its Northeastern and Southeastern U.S. locations, to offset higher commodity costs. Chipotle doesn’t think the price increase will affect customer visits, and shareholders responded well to the news. Following the announcement, the stock hit an all-time high above psychologically important $300 round number resistance.
The Technical Picture
Technically, Chipotle looks strong. The stock has been in a Major uptrend since late 2010, when it was trading around $80.
The stock has been steadily climbing since that time. In March 2011, the shares bullishly broke above old resistance — which had become new support — around $250. In doing so, the stock bullishly completed a large ascending triangle pattern.
Upon completing this pattern, the shares were then wedged between $250 support and resistance around $290. However, this past June 27 trading week, the stock broke above this resistance, reaching an all-time high above $308.
With no historical resistance in sight, the stock appears ready to surge.
According to the measuring principle for the recently completed ascending triangle — calculated by adding the height of the triangle to the breakout level — shares could reach a price target of $371.11 ($295 – $213 = $82); $295 + $82 = $377). At current levels, this represents a potential gain of about 20%.
Fundamentally, the burrito chain looks poised for healthy growth ahead.
The stock beat analysts’ first-quarter sales expectations of $494.6 million, while revenue for the period increased 24% to $509.4 million, up from $409.7 million in the year-ago quarter. A boost in same-store-sales, combined with an increase in customer visits, fueled growth.
Second-quarter results will be reported on July 19. Analysts project revenue to increase 19.4% to $557.3 million, from $466.8 million last year. For the full 2011 year, revenue is expected to rise to $2.2 billion, a 19.4% increase from $1.8 billion last year. By 2012, analysts expect revenue will increase a further 16.9% to $2.6 billion.
The earnings outlook is equally strong. First-quarter earnings rose 20% to $1.46 per share, from $1.19 in the comparable period a year ago. Analysts expected slightly lower earnings of $1.43 per share. Better cost control measures, combined with strong sales, contributed to the growth.
For the upcoming second-quarter, analysts project earnings will rise 15% to $1.46, from $1.68 in the same quarter a year-ago. For the full 2011 year, the 25 analysts following the company project earnings will rise 21% to $6.81, from $5.64 last year. With the restaurant chain likely to keep adding store locations, analysts predict 2012 earnings will increase a further 24% to $8.42.
Although Chipotle is richly valued, the company is in a strong cash position, with $327.9 million in cash and only about $3.8 million in long-term debt. This financial liquidity gives it the opportunity to continue opening new store locations down the road.
Action to Take –> Given that Chipotle Mexican Grill is technically and fundamentally strong, traders should consider going long. Based on the measuring principle, my target is $377.00, good for a gain of about 20%. My stop-loss is $249.57, near a key support level. If the stock fell below this price, it would break the Major uptrend line.