Small-Cap Spotlight: Chewing on Chipotle

Next year, however, the expected growth rate drops to 25%. Should we assume the rate of earnings growth will keep declining? I'm willing to use 25% in my analysis, which yields a PEG ratio of 2.0, well above the 1.0 value that I like when looking at a stock. And even if we plug in a 35% growth rate, the PEG still comes out at 1.4, which is still high but more in line with the rest of the group. Note that I'm not recommending any of the other restaurant plays as an alternative. I'm not a fan of the group.

On the bright side, there are already a lot of traders betting against Chipotle, having shorted 31% of the outstanding float according to most recent data from Nasdaq.com. This large short position indicates that investors are already wary about the company's stretched valuation.

However, my contrarian nature makes me unwilling to join the party of short-sellers, as the bandwagon looks pretty crowded already. I'm more concerned that potential buyers at this level aren't getting significant upside over the long term. Chipotle's outstanding performance in 2007 puts a strain on 2008 results because, as the bar gets set higher and higher, it becomes that much harder to overcome, which will be the key to driving the share price higher.

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