Chipotle: Great at Upsetting Investors' Stomachs

NEW YORK (TheStreet) -- As a value investor, there was a point when I would have considered a 25% to 30% drop on a stock due to an earnings miss an overreaction. In fact, it would signal that it just might be time for me to buy because there is fear on the street.

However, when it becomes clear that the stock is yet facing some valuation challenges after the fact -- particularly with the metrics that matter -- it forces me to wonder if that reaction was drastic enough.

This scenario seems to be especially relevant to Chipotle Mexican Grill (CMG) after having dropped from $404 per share just prior to its earnings report to just slightly over $300 in what seems like a blink of an eye.

While its came as a surprise to most, it should not have been the bombshell that many have made it out to be. If one took time to carefully study the stock, it could have been seen a mile away -- or at least a couple of days ahead of the report.

The questions on investors' minds are, when will the bleeding stop and at what point does the stock become a buy? Before we try to answer, let's take a look at what caused the indigestion.

Some Upset Stomachs

For the quarter ending in June the company reported a net income of $81.7 million, or $2.56 per share, on revenue of $690.9 million. This compares with having earned $50.7 million or $1.59 per share in the same period of a year ago.

Essentially its total revenue soared 21% due to an increase in new store locations as well as higher foot traffic at its existing restaurants.

In fact, the company said it saw an 8% increase in revenue from its stores that have been opened at least one year. In the restaurant business, this is one of the best indicators of strength and a critical appraisal of fiscal performance as it removes potential outliers from newly opened or closed stores.

Clearly the company is doing well in all facets of its business. So what exactly was the problem? Investors wanted more.

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