Chipotle (CMG): Ingredients Right, Short Term Outlook Positive

Traders could nibble at the long side using a sell-stop below the recent lows.
By Bruce Kamich ,

NEW YORK (TheStreet) -- There are a few guidelines to keep in mind when using technical analysis. First, it probably works best in conjunction with another approach like fundamentals or quantitative techniques. Second, it is more of a wind sock than a crystal ball in that it can't be expected to call every turn. Third, experience and art count. Technical analysis is more than just science. Or, support is a zone or an area rather than a horizontal line in the sand. Keep that in mind as we look at Chipotle Mexican Grill (CMG) - Get Report .

Looking at this chart of CMG, above, I see a couple of things to emphasize. On the bear side, the price of CMG is below the 20-day moving average and it broke support in the $620 to $600 area. On the positive side, CMG is generating an oversold buy signal from the slow stochastic, and we can see a bullish divergence between the price action making lower lows and the momentum study making a higher low.

This longer view of CMG is interesting. The price chart shows what could be a broadening pattern, or an inverted triangle (see my book "Chart Patterns" for more on this) over the past 18 months. This pattern has wider and wider price swings, so the breaking of support and resistance areas is expected as the pattern forms. The lower panels show a weekly oversold buy signal and the On-Balance-Volume line is holding above its last low, even while prices made lower lows.

Putting the short-term and longer-term pictures together, we have a positive short-term outlook for CMG. Traders could nibble at the long side using a sell-stop below the recent lows.

TheStreet Ratings team rates CHIPOTLE MEXICAN GRILL INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

We rate CHIPOTLE MEXICAN GRILL INC (CMG) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, increase in net income and notable return on equity. We feel its strengths outweigh the fact that the company has had lackluster performance in the stock itself.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 1.4%. Since the same quarter one year prior, revenues rose by 12.2%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • CHIPOTLE MEXICAN GRILL INC has improved earnings per share by 10.6% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, CHIPOTLE MEXICAN GRILL INC increased its bottom line by earning $14.13 versus $10.46 in the prior year. This year, the market expects an improvement in earnings ($17.31 versus $14.13).
  • The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the Hotels, Restaurants & Leisure industry average. The net income increased by 10.8% when compared to the same quarter one year prior, going from $130.80 million to $144.88 million.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Hotels, Restaurants & Leisure industry and the overall market on the basis of return on equity, CHIPOTLE MEXICAN GRILL INC has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.
  • The gross profit margin for CHIPOTLE MEXICAN GRILL INC is currently lower than what is desirable, coming in at 28.31%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of 11.90% trails that of the industry average.
  • You can view the full analysis from the report here: CMG

Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of Jim Cramer, TheStreet or any of its contributors.

Loading ...