Comeback Stock Stories: The Fall and Rise of Chipotle

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For this episode of Motley Fool Answers, Robert Brokamp and Alison Southwick enlist Motley Fool analyst Seth Jayson for a discussion of comeback stocks, focusing on a few well-known companies that have been beaten down then turned things around for patient shareholders. They also consider the kinds of circumstances under which Foolish investors will want to jump into stocks that are in the midst of being punished by Wall Street.

In this segment, they consider the E. coli–propelled plunge of former fast-casual heartthrob Chipotle Mexican Grill (NYSE: CMG). Overvalued at its height, it took a sustained plunge once food-safety issues replaced tasty burrito bowls as the big story around the brand. Now that it has somewhat escaped the steady drumbeat of bad press and climbed partway back from the bottom of its valley, how should investors view the restaurant chain? The Fools discuss.

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A full transcript follows the video.

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This video was recorded on Sept. 18, 2018.

Alison Southwick: Let's move on and talk about another company that has been in the headlines a lot, Chipotle.

Seth Jayson: This is an example of one that has sort of come back, almost, but not quite so much.

Southwick: I remember Tom Gardner went to some restaurant convention and everyone was like, "Oh, yeah. Chipotle's going to come back. They're great. They're going to come back." And it's just taken so long.

Jayson: And this was a much more complex situation. Chipotle, at $750 a share or so back in 2015, was a company that was not only very richly priced based on its current operations, but everybody had this idea that, "Oh, Chipotle can open whatever kind of restaurant they want, because they're really a platform for great restaurants."

Southwick: Pizza. Thai food. Or was it Vietnamese?

Jayson: ShopHouse, yeah. I always thought that was kind of BS. I owned the stock at that point, and I thought that was really overblown. But then they started giving people diarrhea. They had a whole bunch of food-safety problems and it became evident that they, despite bragging about how great their food-safety culture was, it really wasn't so great. It was nowhere close to best in class.

Best in class would be something like McDonald's. Now, this is ironic. McDonald's had grown Chipotle. They owned Chipotle for a long time, and they taught Chipotle how to do a lot of what enabled it to become successful, but somehow Chipotle had not absorbed the lessons on food safety.

So Chipotle dropped down into the $500ish range. It sat there for a couple of years until 2017 and then started making people sick again and then it dropped down. It was like $270 a share not so long, ago, and it's back up to $500, so the comeback is sort of there. But by now we know that first, it costs more money to do things more safely, so Chipotle's margins aren't as good. And the other is I don't think anyone believes, anymore, that they can just open whatever kind of restaurant they want. They're not a restaurant platform. And quite frankly, I still worry about the valuation now. I still own a lot of shares, but it seems expensive to me.

Now they've got an ex-Taco-Bell-er running things and people expect a little less pompous food culture and a little bit more of, "Hey, let's give people what they want."

Southwick: And as someone who works with reporters [because my job is PR], I wonder if they hadn't have had so much of that pompous food culture, as you called it, would reporters have latched onto the story so much and would it have been as damning as it was to the company, because it was a story that reporters loved to report on. Chipotle, the place is supposed to be amazing. Oh, guess what? They're not.

Jayson: Yes, they brought some of that on themselves. In some of the early reporting, even before they started making people sick, The New York Times showed just how many calories were in a Chipotle meal. It's just enormous. And Chipotle's own marketing was touting the size of its burritos, so they had these messages that were kind of at cross-purposes, because by telling people, "Oh, we're getting rid of GMOs, and everything's so natural," you're strongly hinting that this is healthier than the average food. And really, they were getting so much fat, salt, and calories that if you ate one of these things, it was almost a full day's worth of calories for a regular person.

The only kind of person who could eat that ...

Southwick: Is you.

Jayson: ... would be me, running 10 or 15 miles a day.

Southwick: For those who don't know, Seth Jayson is an avid runner.

Jayson: So you put in an extra 500 calories and that's four miles of running, or so, you need to do to get rid of that.

Southwick: It is. You have to run so far!

Jayson: I know, because when I run, I have to put the extra calories in to avoid wasting away.

Southwick: I don't have that problem.

Robert Brokamp: You're like 6'3" and like what? 150? How much do you weigh?

Jayson: I weighed myself yesterday. In the evening it was 162.

Brokamp: Oh, God!

Jayson: Which is up about eight pounds from a few weeks ago, and I just wasn't hungry, but I was still running.

Alison Southwick has no position in any of the stocks mentioned. Robert Brokamp, CFP has no position in any of the stocks mentioned. Seth Jayson owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool recommends The New York Times. The Motley Fool has a disclosure policy.