Let's get this out of the way. I love burritos. I mean I really, really love them. I, like many others, have stayed away from Chipotle (CMG) for quite some time. I have stayed away from the restaurants, and I have steered clear of the stock, with the exception of occasional short positions, never in size.
The firm reported last night. Chipotle did beat expectations for EPS by two cents, and it did meet revenue projections on a year-over-year increase of 7.8%. Comp store sales increased 0.9%. Operating margin did increase 140 basis points. Labor costs were stable. Expenses were lower.
It sounds like the company is trying. Unfortunately, the stock went out last night at 24 times forward-looking earnings. McDonald's (MCD) is trading at 20 times. McDonald's pays you nearly 2.5% to own the shares. Chipotle doesn't pay you. Okay, let's try to figure out, on a tactical level, where this thing is going.
The last sale (overnight) that I see for this name is roughly $281. That is troubling from a technical perspective. You can see on this chart that the stock has been experiencing an upward trend from late October that includes broadening top and bottom trend lines. That's sloppy. Sloppiness extends toward a lack of confidence. That's my opinion. You may disagree. Relative Strength, as well as the daily moving average convergence divergence (MACD), also exhibit weakness. Money Flow looks to be showing some kind of improvement, but that will likely change once this morning's action is added to the chart.
Herein lies the problem. The stock bounced at $293 this week. That was nearly a precise 61.8% re-tracement of the low-to-high move from October through early January. If the market were higher, and if this name were trading higher, being this stock displays obedience to standard Fibonacci levels, you probably could have targeted $313, or aggressively $325.
See the purple arrow? That's a serious violation of what past performance of this name according to its own Fib levels implies. This will not be lost on the algos this morning. They look at the same charts we do. Now, if the stock does indeed open down here ... $293, if you're lucky, is likely to show up as resistance. This is also below December support and November resistance. A 100% re-tracement, which would place this stock in the low $260s is not beyond possibility.
My thought is to eat your burritos here if you like, but to sit this one out from an equity perspective. As for options, a long position in something like a $275 put expiring in a month might be worth the risk/reward. Caution, though. You could have paid $6.50 for this last night. You'll pay a lot more this morning.
(This is an excerpt from Stephen "Sarge" Guilfoyle's Morning Recon, which now appears exclusively on Real Money, our premium site for active traders. Click here for a free 14-day trial and receive Morning Recon every day, along with exclusive columns from Jim Cramer, James "RevShark" DePorre, technical analyst Bruce Kamich and more.)