Chipotle Stock Alert: Why Investors Should Buy the Dip In CMG Shares

Investors should view the recent decline in Chipotle Mexican Grill (NYSE:CMG) as an opportunity to buy Chipotle stock hand over fist. The stock has declined nearly 10% since the June 26 split.

The 50-for-1 stock split was the first ever for Chipotle and one of the largest such transactions in the New York Stock Exchange’s history. This (almost certainly temporary) pullback only made the stock cheaper and more attractive, given the strong underlying fundamentals of the company.

A Huge Split for Chipotle Stock

Chipotle’s first ever stock split took the company’s share price down from $3,210 to $64.20. The stock is now trading at $57.55 per share, having fallen 17% from a 52-week high reached right before the split happened.

While the stock split hasn’t changed the fundamentals or valuation of Chipotle’s stock, it has made the shares more accessible to investors who previously couldn’t afford them.

People today can literally buy CMG stock at its lowest price since the company held its initial public offering back in 2006.

Shrewd investors should keep in mind that Chipotle has been a long-term winner for stockholders, posting gains that are better than many high-flying technology stocks.

Despite the post-split drawdown, Chipotle stock is still up 40% over the last 12 months. In the past five years, the shares have gained 283%.

Continued Growth

Chipotle stock has been propelled higher by a sterling record of earnings outperformance. Most recently, Chipotle posted better-than-expected financial results for this year’s first quarter and raised its forward guidance.

For Q1, Chipotle reported EPS of $13.37 compared to $11.68 that was forecast on Wall Street. Revenue totaled $2.70 billion versus $2.68 billion that was the consensus expectation of analysts. Sales rose 14% from a year earlier.

Chipotle said that its same-store sales rose 7% in Q1, beating estimates of 5.2% growth. The restaurant chain added 47 new locations during the quarter, moving closer to its goal of doubling its total number of restaurants to 7,000 outlets.

As for guidance, Chipotle said it anticipates same-store sales growth in the mid-to-high single-digit percentage, up from its prior range of a mid-single-digit increase. The company also reiterated its forecast of 285 to 315 new store openings this year.

Chipotle is scheduled to report its second-quarter financial results on July 24.

Minor Controversy

Despite all its success, Chipotle has found itself embroiled in a minor controversy.

A customer backlash has developed online over complaints that the company has shrunk its portion sizes at the same time that it has raised prices. Management has disputed claims that portions have decreased, though they have acknowledged raising prices to keep pace with inflation.

Chipotle most recently raised prices across its entire network last October, citing persistent inflation and higher input costs. More recently, Chipotle raised prices in California by 7% in April of this year to offset the state’s higher minimum wage for fast-food workers.

While the controversy could be a factor in the recent slide of CMG stock, any impacts are likely to be short lived, especially as inflation continues to decline and interest rates move lower in coming months.

Some analysts have also raised concerns about the valuation of Chipotle stock, noting that the shares trade at 60 times future earnings estimates. While high, the multiple on the stock is a reflection of the sustained growth at the company and demand for its shares.

Buy Chipotle Stock

Chipotle looks like a good bet after its recent 50-for-1 stock split. The split and pullback in the share price have put CMG stock at its most affordable level in more than 10 years.

The company continues to grow at a strong and steady rate. There is every reason to believe that the growth trajectory can continue.

Complaints about portion sizes and higher prices will fade in time and should not be a major long-term factor. For these reasons, Chipotle stock is a buy.

On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.