Despite Chipotle Surge, Investors Should Avoid the Stock

On Monday, shares of Chipotle Mexican Grill (CMG) plummeted following the news that the company was hiring lawyers to defend its business against activist investor William Ackman.

However, on Thurday, shares of the beleaguered Tex-Mex restaurant chain rose 1.43%, following a 2.76% surge the previous day. The reason for the rise? One possibility: On Tuesday, two union-affiliated shareholders in the company stated that they will propose the ouster of the company's founder, Steve Ells, as chairman.

Investors want big change in Chipotle, and Ells is more associated with the old way of doing things.

Amalgamated Bank and CtW Investment Group filed a resolution on Tuesday to remove Ells from the company's leadership and replace him with an independent chairman. Ells is also co-chief exec of the company. And, apparently, the decision is being applauded by Wall Street.

This news comes just days after anonymous sources informed the media that Chipotle had hired the services of investment banks Goldman Sachs and Morgan Stanley, as well as the high-powered law firm Wachtell, Lipton, Rosen & Katz and public relations firm Joele Frank to protect its business from Ackman and his hedge fund, Pershing Square Capital. Joele Frank is known for helping companies defend against high-profile, activist investors. 

Pershing Square gobbled up a 9.9% stake in the company back in September, making the hedge fund the company's second-largest shareholder.

Ackman is well known for pushing for major changes at the companies in which he gobbles up large stakes. And many times, that involves affecting a shake-up in a company's board... much like the one proposed today.

Clearly, something drastic needs to be done to revive Chipotle's fortunes. It's been more than a year since the company's stock price first dropped on news of an E. coli breakout at several locations. Yet the company still has to lure back customers -- and investors. Chipotle has launched high-profile promotions, such as this summer's Chiptopia rewards program, but to little avail.

True, most of the restaurant sector is seeing stagnant sales as we enter what some analysts are referring to as a "restaurant recession." Even fast-food stalwarts such as McDonald's and Restaurant Brands International's Burger King are seeing tepid growth.

However, Chipotle is the most toxic of the bunch. It will take a lot of big changes to the company and its governance to improve the business and its stock. And even then, a return to the lofty highs above $700 per share that the company posted just last fall is unlikely to occur, at least any time soon. Continue to avoid Chipotle.

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The author is an independent contributor who at the time of publication owned none of the stocks mentioned.

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