Today, I’d like to pass along a little update I wrote from members of my premium investing newsletter, Game-Changing Stocks. While I typically focus on lesser-known companies with triple-digit gain potential that are poised to disrupt the way companies do business and consumers live their lives, I simply think this opportunity is too good to pass up.

Late last year, health officials traced an outbreak of E. coli to Chipotle Mexican Grill (NYSE: CMG). A few dozen people wound up getting sick, and shares of the popular burrito joint — known for fresh, high-quality food — dropped precipitously. The shares are down nearly 10% for the year to date against a slight 0.3% gain in the benchmark S&P 500 index.

#-ad_banner-#Chipotle’s fall from grace has erased any alpha from the past 12 months and even pushed its five-year performance below that of the S&P. Only extremely long-term investors have any real right to be pleased with how things have turned out: They’re up more than 600% versus a nearly 60% gain in the market during the past 10 years.


Chipotle having a problem with food quality is like Volvo announcing that its cars aren’t safe or Apple saying that its new iPhone is great but is just hard to use. All of these things would effectively mulch the company’s leadership position.

The company’s efforts to manage its crisis were C+ at best. The optics were just lousy: News directors nationwide showed video of empty restaurants and man-in-the-street interviews with people who swore up and down that they were done with the place. The company, for its part, offered a careful and thorough audit of its supply chain. But auditing a supply chain just doesn’t grab people’s attention — not even if the company has made its supply chain a selling point.

The cutesy stories on Chipotle cups about which farms source which products and how nicely they treat the animals didn’t matter much to consumers who learned the outbreak likely came from onions or cilantro, two ingredients that are tasty and good for you but which are not cooked and therefore susceptible to becoming an unknowing carrier of E. coli. The CEO’s pleas for people to come back and eat a safe meal were weak, and things didn’t really change for the better until the Centers for Disease Control and Prevention officially declared the outbreak over Feb. 1.

To add insult to injury, Chipotle took it on the chin in its first-quarter earnings announcement, in which the burrito slinger posted its first quarterly loss. Revenue was down 23% on a year-over-year basis to $835 million.

But as a great investor once said, “Who cares?”

It’s Time To Scoop Shares Up While They’re Cheap
In my premium newsletter, Game-Changing Stocks, we don’t pay a lot of attention to earnings reports. They’re report cards on the past, they vary, Wall Street overreacts and then the ship typically rights itself. As long as the underlying case for making the investment doesn’t change significantly, you hold the course.

The question is whether Chipotle can ride it out, and I think the answer to that is a resounding yes, regardless of its lackluster earnings report.

Chipotle basically created the category of fast fresh. It has loyal fans. Now, to be sure, a lot of folks are questioning that loyalty right now. So I would point out two critical things. First, the company’s efforts to woo back customers — going so far as to offer free food — are having an impact. Second, the simple fact of the matter is that most of Chipotle’s fan base — how do I put this nicely — is extremely susceptible to good marketing. And Chipotle will be successful at wooing them back. It will take time, but they will return.

Chipotle is amping up its marketing to accomplish this, giving away food, even using direct mail to appeal to diners. It’s working on a loyalty program, and these are extraordinarily powerful. Loyalty programs are huge revenue drivers, and Chipotle’s fan base is likely to embrace them with loving arms.

It’s also expanding its menu. This is, to borrow a term we’ve all learned recently, yuge. Chipotle’s menu is limited. Some say adding to it will weaken the brand. But adding to the menu and offering something new gives Chipotle a new hook to snare customers with. I have no doubt it will be successful.

And this is just what the company has announced publicly.

So far, management’s “rescue” marketing efforts in response to the E. coli brouhaha have been fairly slow to catch on. But it is working. And I think that the company will continue these efforts and achieve a resurgence what will knock Wall Street’s socks off.

Chipotle has $250 million in cash, enough resources to finance any marketing thrust it decides on. It has no long-term debt, which gives it a lot of freedom. And the balance sheet is strong: The equity trend is favorable, and that equity is almost entirely tangible, with only a smidgen of goodwill and no intangibles in its asset accounts. Institutional ownership is high, and though the share price has taken a drubbing, the company is still trading at an earnings multiple of 40, which means Wall Street still sees roughly twice the earnings growth potential as the broader market.

I recently noticed that even after the earnings announcement, analysts at J.P. Morgan maintained their “overweight” ranking on the shares. It dropped its price target to $485 from $510, which is only 5% and is, in my view, extremely conservative given this company’s past results, current financial condition and market position. It is a strong company trading at a fire sale price.

My advice: If you’re looking for a solid brand trading at a discount that’s likely to beat the market over the next couple years, then consider buying Chipotle . 

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