Today we’ve got a quickie for you, in response to a couple questions about the Cabot Top Ten Trader teaser pitch that came out over the weekend.
Top Ten Trader ($137/year) is a short-term newsletter edited by Mike Cintolo, he basically sifts out ten of their favorite growth stocks each week, and I think they’re typically just culled from the other Cabot newsletters (thought that may have changed by now). Cabot itself is generally a momentum growth shop, so you could think of this as a “best of” newsletter of theirs — I have no idea what the trading performance is like (they say, of course, that it’s fantastic — and I would imagine the past few years of wild momentum growth stocks have been good for them).
So what is it they’re hinting at now to lure subscribers? Here’s how Cintolo frames it:
“Each week I use a proprietary stock picking system to select 10 stocks identified as having strong growth potential.
“Of those, I select one as the top pick. The one to buy if you’re buying only one….
“My most recent top pick has had a powerful story of success before hitting some headwinds. It is now back on track thanks to some smart moves from management.”
OK, so what’s the stock? Here are our clues:
“The company, in the retail food service industry, has a large and growing store base. And those stores are domestic which insulates the company from foreign trade issues.”
And my favorite clues, some numbers…
“Q3 saw revenue accelerate to 9% and same-store sales grew 4.4%.
“That growth was driven in part by a 48% explosion in digital sales, accounting for more than 11% of corporate revenue.
“Better yet, earnings boomed a whooping 62% thanks to greatly improved margins – a trend that is likely to continue into 2019….
“Earnings per share doubled in 2017, increased by 30% in 2018 and is expected to grow by more than 40% in 2019.”
So who is it? This is what Cintolo says…
“Obviously I can’t reveal the name of the company here – part of what makes these good investment opportunities for subscribers is that they’re confidential.”
Well, we have no such qualms… if you’re going to drop lusty hints about great performance in order to get people to pull out their credit card, we’ll happily “reveal” those “secrets”… as long as the Thinkolator can find the info of course.
So can it? I know, I know, silly question… of course! This is good ol’ Chipotle (CMG).
Which I still kick myself for selling 1,000 years ago (OK, maybe it was 10 years ago, back in the good ol’ days when McDonald’s was their biggest investor and they still had multiple share classes).
But anyway, the reason we can keep it short and sweet today is that Chipotle is one of the more over-covered stocks in the media, and it has been doing phenomenally well this year in their “rags to riches to rags” story so you can certainly find enough info to back up whatever opinion you want to have on this stock.
And yes, it’s a perfect match — they did restore same store sales growth last year, and get revenue growing again as they got past the worst of their health and safety scares (at least for now, fingers crossed) and invested heavily in growing their digital sales platform (which, yes, did grow 48% in the third quarter last year… though it has since accelerated further, up 66% when they reported their fourth quarter last month.
Which has sent the stock on a tear, as you might notice — they’re not quite back to their pre-e-coli highs of $750 or so in 2015, but at the devil’s own $666 as I type they’re certainly getting closer.
There’s a free Motley Fool article on the Q4 earnings beat here if you’re curious.
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That surge in the share price has come because of renewed enthusiasm for their growth potential, of course, since that’s what investors want to pay for more than anything else. The expectation now is that the $9 in (adjusted) earnings they posted for 2018 will become $12.29 in 2019 and $15.50 in 2020… so the forward PE is either 54 or 42, depending on which year’s numbers you use.
And though Chipotle is a fairly mature company at this point, it’s still not terribly massive and they are trying to lever their future revenue growth by both adding more stores (probably adding another 150 stores to the 2,500 currently open, a continued slowdown in store growth but still a substantial increase), and by adding second “lines” for digital and delivery orders to most of their stores this year, which, in busy locations, could add considerable growth capacity.
There’s an interesting story here on the growth strategy, with optimistic quotes from their Chief Development Officer that the company “hasn’t even scratched the surface” when it comes to their US presence.
And for those who are following Bill Ackman’s Pershing Square, which I wrote about a few weeks ago, Ackman famously bet big on Chipotle in 2017 and finally had a recovery in the Pershing portfolio (fueled partly by Chipotle) in 2018), and word in recent weeks is that Pershing has been gradually selling some of its position but remains a major shareholder (Pershing owns about 7% of Chipotle).
So yes, analysts see some big growth continuing for Chipotle as it tries to recover the “growth darling” mantle it proudly wore for the first ten years of its young life… and for a company of this size ($18 billion, which is pretty big for a restaurant chain — only McDonald’s and Starbucks are much larger among the single-brand restaurant companies), 30% earnings growth is pretty remarkable (as is 10% revenue growth, frankly), but, well at $666 a share you’re paying a pretty unholy premium price for that growth. Sometimes that works, as it did for patient Chipotle shareholders from 2009 to 2015… sometimes it doesn’t, as Chipotle shareholders in 2016 and 2017 can attest. Expectations that the growth will once again be strong and steady are pretty well embedded in the shares now.
And I’ll pass it now back to you, dear friends… have a Chipotle opinion to share? I admit to a soft spot for a carnitas burrito, but can’t quite stomach buying back into the CMG growth story after this quick resurgence… but it’s not my money, and I often have stomach troubles when it comes to buying momentum growth stocks, so your opinion is what counts. Please share your thoughts with a comment below.
P.S. I should note that, coincidentally enough, the only other time I covered a Mike Cintolo Top Ten Trader pitch was in mid-2016, and that tease was also about a restaurant stock that was trading at 50X forward earnings, and I also turned up my hoity-toity nose at that one… and it has since gained 140% if you bought and held the shares (this is pitched as a short-term newsletter, so I have no idea when or if they ever sold). That was Wingstop (WING), in case you’re curious. And no, I’m not bitter.
P.P.S. If you’ve ever subscribed to Cabot Top Ten Trader, please click here to share your experience with your fellow investors — readers want to know which letters you like or loathe… thanks!
Disclosure: As of this writing I own shares of Starbucks among the stocks mentioned above. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s rules.