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Sell Chipotle Ahead of Earnings

Stocks in this article: CMG YUM MCD

NEW YORK ( TheStreet) -- A friend of mine once told me, "Never underestimate the power of great burrito." He said this jokingly because I loathed the idea of overspending for a meal I believed was worth half the price.

There's a correlation here with Chipotle Mexican Grill (CMG), whose stock I've always thought was expensive.

I won't disagree that Chipotle makes a "powerful" burrito. But I continue to worry investors are too willing to give Chipotle the benefit of the doubt as the company's operational performance has not been up to par when compared to Yum! Brands (YUM) and McDonald's (MCD).

Remarkably, as Chipotle's margins are compressing and same-store sales are weakening, the stock is up an impressive 30% year-to-date. With second-quarter earnings due out Thursday, I can't stomach holding this stock, especially since the April quarter raised several red flags.

For instance, even though first-quarter revenue were up 13% year over year, it was also clear the rising costs of protein had taken a toll on the company's margins. That food costs were 33% of Chipotle's revenue is cause for indigestion. The way I see it, as long as food costs remain at such a high percentage of revenue, this will continue to add pressure on management to raise prices - there's no way around it. And investors will demand it.

But here's the thing: I don't think that management can justify raising prices, while at the same time risking an already dire comps situation. Comps -- another way to say same-store sales -- is the metric that tracks the performance of restaurants opened at least one year. Unfortunately for Chipotle, the company has been underperforming in that area, which suggests that its stores are seeing a decrease in customer traffic.

More than anything this has been my biggest source of concern with this company. Since comps reached a peak at 11.1% more than two years ago, the company has suffered declines each quarter since then, culminating in 1% comp growth in the April quarter. Yet, these shares have soared more than 60% since bottoming out at $236.24 last October.

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