Where Will Chipotle Go Next?

With shares of Chipotle Mexican Grill (NYSE:CMG) trading around $497, is CMG an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Chipotle Mexican Grill operates restaurants throughout the United States, as well as two restaurants in Toronto and two in London. The company’s restaurants serve a menu of burritos, tacos, burrito bowls, and salads. Chipotle Mexican Grill manages its operations and restaurants based on six regions that all report into a single segment. It prides itself on serving the best possible ingredients during a time when consumers are more keen to this detail.

Chipotle Mexican Grill, a company that has worked very hard to project an image of social consciousness and responsibility to its customers, is under fire for excessive executive compensation, The Denver Post reports. The company, which has taken a number of progressive measures such as buying ingredients from local, sustainable or organic sources and giving jobs and English lessons to refugees re-locating from other countries, ironically, pays its typical restaurant employees 800 times less than its two CEOs. A shareholder group has threatened to lobby fellow shareholders to vote no on a “say on pay” measure at Chipotle this year. The group, CtW Investment Group, which works with union pension funds and oversees $250 billion in assets, believes it can potentially lobby 40-50 percent of Chipotle’s shareholders to vote no on the measure, which shareholders will vote on May 15 in Denver, according to The Denver Post. Shareholder outcry over Chipotle executives’ compensation comes as controversy heats up over a California bill that proposes companies that pay their chief executive officers more than 100 times the wages of a typical worker should be subject to higher tax rates, in an effort to reduce income inequality in the state.

“With this legislation, we hope we’re starting a national conversation around this, rather than just hope corporations do the right thing,” said Steve Smith, a spokesperson for the California Labor Federation, which supports the bill. “We see California as being on the forefront of progressive economic legislation,” he added, per a Bloomberg report Tuesday. Should California’s initiative succeed, it would become the first state ever to penalize or reward publicly traded companies based on their compensation practices. Michael Pryce-Jones, a senior governance policy analyst with CtW Investment Group, says that Chipotle, which utilizes a pay-for-performance model to determine its CEOs’ take-home salary, “is becoming a poster child” for the model’s failures. The top five executives at Chipotle took home $67.3 million last year, more than 42 percent what Coca-Cola’s executive team brought in, according to The Denver Post, and Chipotle shareholders are paying more than 10 times the median for CEO duties compared with similar size companies generating similar revenues.

T = Technicals on the Stock Chart Are Mixed

Chipotle Mexican Grill stock has been trending much higher in the last couple of years. The stock is currently moving higher and looks set to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Chipotle Mexican Grill is trading slightly below its rising key averages which signal neutral to bearish price action in the near-term.

CMG

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Chipotle Mexican Grill options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Chipotle Mexican Grill options

28.19%

13%

10%

What does this mean? This means that investors or traders are buying a minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Steep

Average

June Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Chipotle Mexican Grill’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Chipotle Mexican Grill look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

7.76%

30.08%

17.18%

10.16%

Revenue Growth (Y-O-Y)

24.41%

20.74%

18.04%

18.22%

Earnings Reaction

-5.93%

11.74%

16.09%

8.55%

Chipotle Mexican Grill has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Chipotle Mexican Grill’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Chipotle Mexican Grill stock done relative to its peers, Panera Bread (NASDAQ:PNRA), McDonald’s (NYSE:MCD), Yum Brands (NYSE:YUM), and sector?

Chipotle Mexican Grill

Panera Bread

McDonald’s

Yum Brands

Sector

Year-to-Date Return

-6.74%

-14.10%

4.31%

1.51%

-2.75%

Chipotle Mexican Grill has been an average performer, year-to-date.

Conclusion

Chipotle Mexican Grill provides consumers with quick, delicious, and healthy food options on a daily basis. The company  is under fire for excessive executive compensation. The stock has been trending higher and looks set to continue. Over the last four quarters, earnings and revenues have been on the rise. However, investors have had conflicting feelings about recent earnings announcements. Relative to its peers and sector, Chipotle Mexican Grill has been an average year-to-date performer. WAIT AND SEE what Chipotle Mexican Grill does next.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

More From Wall St. Cheat Sheet: