Is Your Favorite Company A Bad Investment?

| September 23, 2011 | 0 Comments

Being a fitness nut, I love healthy food.  I really do.  And when I find a great food option for eating out, I get really excited.  Let’s face it… do you really want to cook if you can help it?  But unfortunately, most restaurants are unhealthy.

In the hectic world we live in, eating out is a regular option for most middle and upper class Americans.  And I found this great option that offers quick food, fair prices, and healthy ingredients.  But the real question is this…

If you love a company’s business, does it mean you should buy their stock?  I’ll answer that question in a minute.  I’ll also tell you how to figure out if the company you really want to own is worth buying.

The bottom line is, sometimes a great company’s stock is simply too expensive.  And that’s the case with my new favorite restaurant… Chipotle Mexican Grill (CMG).

I love Chipotle. Virtually everything about them is amazing.  Some people love Apple and their Iphones, other people simply can’t live without their Starbucks coffee.  For me, it’s real fresh food…

As a matter of fact, lots of people agree with me.

If you’ve never been to a Chipotle location at lunch or dinner, let me tell you this restaurant chain is busy.  It’s packed, and I always have to wait in line to order!

I think their appeal is not only great tasting fast fresh Mexican food, but the nature of their food.  It goes beyond fresh and gets into the “organic” and “local” labeling.  And they’ve packaged this concept into a term they call “Food with integrity”.

Here’s the term’s meaning directly from the company…

“Food with integrity is our commitment to finding the very best ingredients raised with respect for the animals, the environment, and the farmers.”

What it means is they’re using local produce whenever possible, and meat from animals raised without the use of antibiotics or added hormones.  They’re creating a new “green/healthy” food niche.

And the concept is a huge hit.

Chipotle currently operates 1,131 stores.  And their growth is off the charts.  In 2010, CMG opened 129 stores.  Given the recent economic downturn, you’d think they’d be slowing down…

Not a chance.  The company is slated to open 135-145 stores this year!  But it’s not just their footprint that’s growing.  Their sales are set to surge higher as well…

Chipotle’s five year revenue growth estimates come in at 20%. That’s a huge growth rate when compared to 15.9% industry average. Even more amazing is they’re just coming off a five year revenue growth rate of 21.2%!

Chipotle stock is up 100% in just one year… even at a massive $333 per share stock price!

Now I’ve said nothing but great things about this company.  I love their food, I love their marketing and concepts, and I really love their sales and financials.  But I don’t own the stock…

Why not?  Simply put, they’re overvalued!

Even though I really want to own CMG, I can’t justify investing in the company.  At least not right now.  Here’s why…

It’s not the $333 per share price tag that keeps me away.  It’s not even the fact that the stock has doubled in a year.  It has more to do with valuations… or how we measure what the company is worth.

And when I look at the most popular way to value a company, it tells me Chipotle is way too expensive right now.

The one metric that jumps out at me is CMG’s forward price to earnings, or P/E, ratio.  It compares a stock price to earnings power.  The company’s measure of future earnings sits at a whopping 38.6x.  Yet the industry average forward P/E is only 18.5x… less than half of CMG’s.

What this means is we’ll have to pay more than double to own Chipotle, versus their competition.  And in the universe of investments, there are better places for us to invest.

You too may have your own favorite company.  But don’t buy the stock simply because you love the company or you think they have a great product.  You have to separate the two factors and make sure you look at the value of the stock before jumping in.

With that said, I can’t wait to buy some shares of Chipotle.  And I will… when it’s a better value!

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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