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Chipotle Mexican Grill reaches all time overbought after an 84% rally in less than 4 months! (1 Apr 19)

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Dear readers,

This week, Chipotle Mexican Grill (“Chip”) has caught my attention with its blistering 84% surge since 24 Dec 2018 and its US$100 rally in the past 16 trading days.

 

First, what does Chip do?

Based on Chip’s company website (click HERE), it is an American chain of fast casual restaurants and has nearly 2,500 restaurants as of 31 Dec 2018 in the U.S., Canada, France, Germany and UK. It is the only restaurant company of its size that owns and operates all its restaurants. Its market capitalisation amounts to US$19.6b.

 

Why is it interesting?

Personally, I think Chip may be a potential short target with a favourable risk to reward proposition with a take profit of a few bids, base mainly on a technical perspective.

 

Basis to short

a) Since 7 Mar 2019, Chip has appreciated approximately US$100 from US$609.53 on 7 Mar 2018 for 14 out of 16 days to close at US$710.31. If this rally sounds incredulous, we should see Chip’s share price performance over the past 12 months. Chip has soared 84% and 120% since 24 Dec 2018 and 29 Mar 2018 respectively;

b) With reference to Chart 1 below, it is evident that Chip is on a strong uptrend. However, due to its relentless rally, it is extremely overbought. RSI closed at 89.6 on 29 Mar 2019 which is the highest since its IPO in 2006. ADX closed at 63.4 on 29 Mar 2019, the highest since Apr 2010, amid sharply positive placed directional indicators. MACD closed at 30.0, near a four-year high level;

Near term supports: US$698.5 / 692.5 / 687.4 / 679.5 / 670.1 / 658.1

Near term resistances: US$725 – 726.8 / 734.1 / 740.2 / 750.0

Chart 1: Chip has soared 84% and 120% since 24 Dec 2018 and 29 Mar 2018 respectively!

Chip 1 year chart 29 Mar 19

Source: InvestingNote 29 Mar 19

c) Based on Marketbeat website (click HERE for more information), Jack Hartung, Chip’s CFO has been selling Chip between US$606.77 – US$680 in the past two months (with higher frequency of sales last month) after the monster rally since 24 Dec 2018;

d) Based on Fig 1 below, average analyst target is around US$577 with the latest report from Barclays pointing to a target price of US$485.

Fig 1: Average analyst target US$576.84 à 19% potential downside!

Chip analyst target 1 Apr 19

Source: Bloomberg 1 Apr 19

As usual, it is necessary to consider the potential risks to have a balance view. Some of the risks include (but not limited to):

a) Chip’s average true range amounts to US$12.62. This is a volatile stock and its volatility needs to be taken into consideration for position sizing;

b) I am not familiar with Chip’s fundamentals. This is my first time looking at this stock. I am not sure whether there are any reasons for the sharp up-move (known to the market but unknown to me), besides its strong results announced in Feb 2019;

c) Some analysts continue to raise their target price for Chip. It is noteworthy that the highest target price is around US$770;

d) There is no rule that RSI cannot go above 90 or even 95. However, on the balance of probability, it is less likely that Chip can keep on rising without some form of pullback as overbought pressures escalate;

e) Market seems to have mixed views on Chip. Do see the following links to have a balance view

  • 4 Reasons Why I’m Selling Chipotle (The Motley Fool 31 Mar 19) (Click HERE)
  • With Chipotle Stock Near Highs, Bears Remain Wary. An Analyst Says They’re Wrong (Barron’s 29 Mar 19) (Click HERE)

 

Conclusion

In view of the above, there is no doubt that Chip is on a strong uptrend. However, it seems likely that near term potential upside may be capped, as overbought pressures escalate. Depending on how the U.S. market and Chip’s price later, I may be initiating a small short position in this stock via CFDs, with the aim of getting a couple of bids of potential profit if any. This is a trade based on potential retracement, as overbought pressures escalate and not a trend reversal play. Nevertheless, there are significant risks (highlighted above, for example, I am not familiar with Chip’s business and its fundamentals) which we should be aware of. It is noteworthy that as I am a full time remisier, I can change my trading plan fast to capitalize on the markets’ movements (I am not the buy and hold kind). Readers should exercise their due diligence and evaluate carefully.

 

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