Downgrade Threatens to Extend Chipotle Stock Pullback

The analyst thinks CMG is pricing in an overly upbeat earnings outlook

Managing Editor
Oct 1, 2018 at 9:14 AM
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Chipotle Mexican Grill, Inc. (NYSE:CMG) stock is down 2.1% in electronic trading, after Oppenheimer downgraded the burrito chain to "underperform" from "market perform." The analyst in coverage believes the the stock has priced in an overly optimistic earnings path, even with healthy sales numbers. Chipotle is expected to report third-quarter earnings on Thursday, Oct. 25. 

Should today's premarket price action pan out, Chipotle stock could breach its 120-day moving average for the first time since early February. Just below here is the $430 region, which cushioned pullbacks earlier this year. The shares raced to a two-year high of $530.49 on Aug. 16, but since then have given back 14%. Overall, CMG has added 81% since Brian Niccol was named CEO on Feb. 13.

Despite Chipotle stock's longer-term trajectory, the majority of analysts in coverage share Oppenheimer's skepticism. Of the 25 brokerages covering CMG, 16 rate it a "hold" or worse. Further, the security's average 12-month price target of $468.71 is only a 3% premium to Friday's closing price of $454.52.

In the options pits, there's been notable CMG put activity across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). The equity's 50-day put/call volume ratio sits at 0.84, and ranks in the 70th percentile of its annual range. This means that although options traders have still leaned toward calls over puts on an absolute basis, Chipotle puts have been purchased relative to calls at a faster-than-usual clip during the past two months. 

Regardless of direction, now seems to be an attractive time to purchase short-term CMG options. This is per the stock's Schaeffer's Volatility Index (SVI) of 27%, which ranks in the 12th percentile of its annual range. In simpler terms, short-term options are cheap, from a volatility perspective.

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