Penney: Chipotle Has A Lot More Downside | $CMG

Takeaway: Hedgeye Restaurants analyst Howard Penney remains short Chipotle (CMG).

Penney: Chipotle Has A Lot More Downside | $CMG - chipotle cartoon  

Another day, another big down move for shares of Chipotle (CMG). The stock is off over -5% after the company reported the impact a recent norovirus outbreak had on its financials. Quick take: Not good. 

 

It gets worse.  

 

The beleaguered restaurant chain further disclosed that it was a served a Federal Grand Jury Subpoena from the U.S. District Court for the Central District of California, to be investigated by the U.S. Attorney's office for the Central District of California, in conjunction with the U.S. FDA.   

 

In Chipotle's own words:

 

"It is not possible at this time to determine whether we will incur, or to reasonably estimate the amount of, any fines, penalties or further liabilities in connection with the investigation pursuant to which the subpoena was issued."

 

***Editor's Note: Penney has been warning investors about the underappreciated risks of owning Chipotle shares since September. The stock is down 39% since he made his short call. To access his team's most recent institutional research ping sales@hedgeye.com.  

 

 Penney: Chipotle Has A Lot More Downside | $CMG - chipotle chart

 

Outside the lawyerly realm, Penney argued that Chipotle's "food with integrity" motto was also under fire. Just before Christmas, he conducted a survey assessing the consumer hit the company would take in the wake of all the foodborne illness attention it has received. 

 

"... We conducted a survey of Chipotle consumers to get a read on how much this outbreak will affect future business performance. Specifically we screened participants by asking them: have you stopped going to Chipotle because of the E. coli outbreak? In which, 31.3% of respondents said “yes” they have stopped going.

 

Our first reaction was that this was lower than we were expecting, just given what we have seen with our own eyes at Chipotle restaurants here on the east coast. But people may have been thinking they are just waiting for the all-clear from the CDC and then they will return, which we have heard plenty of times from people we have talked to (these people may have registered as a “no”).

 

Subsequently, we took the people that answered “yes” and asked them if they would ever go back to eat at a Chipotle restaurant again. An astonishing 56.8% of respondents (out of 200 people polled) said they would never go back to a Chipotle. Now you can say what you will about the number of people polled, but over half of those people said they would never go back. That is an alarmingly high number, and implies a very rough road ahead for Chipotle."

 

Clearly, the damage to the brand is palpable.

 

in the video below, Penney lays out his broader thesis...

 

Another must read: Penney's scathing "open letter" to Chipotle CEO Steve Ells.

 

Bottom Line:

 

Watch out!


Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more