As the stock market has climbed over the past few weeks, I’ve lightened up on some of our bigger winners simply because they’re pretty stretched at this point (sell high). But I’m also always looking for new opportunities in stuff that’s gotten roughed up in which to invest (buy low).
I used the big rally to sell our entire position in Chipotle over the last week. I love the product and could eat there every day but there’s often a difference between an underlying company/product and the stock. This is one example. Chipotle is a high growth, high-flyer. The problem with stocks like this is that they often get pushed to very rich valuations and if they fail to deliver on continued high rates of growth, you will see the stock take a BIG hit as Chipotle did 2 years ago when it nearly got cut in half after disappointing two quarters in a row. At this price, I think Chipotle is pricing in a rate of growth that just will not be achievable over the next 5-10 years. This happens to all companies as they mature (and Chipotle is still very young) but is reaching the point where the annual rate of growth slowly declines. The bulk of growth comes from the youngest stores in their first 5 years of existence and then once mature and operating near max capacity, is somewhat limited to price increases on the menu. Because they’re only able to open a limited number of new locations each year, the percentage of stores providing above average rates of growth drops and the company’s total growth slowly approaches the long-term cap. I’m also not a big fan of how much the company’s executives have abused their compensation privileges. Shareholders finally voted against pay increases last month but the damage has been done through share dilution and I just don’t think management acts appropriately to maximize shareholder value. I currently think Chipotle is anywhere from 25% to 40% overvalued at this price making it time to take profits. I’ll gladly revisit the stock if it gets knocked down to more favorable valuations in the future.
Chipotle (CMG) – 3 years, weekly chart
Chipotle (CMG) – 6 months, daily chart
I bought some Toyota earlier this week for two reasons. First, the global auto market has really picked up steam this spring and I’m expecting it to remain strong. Second, and more importantly, I think the Japanese Yen will be making its next leg lower during the second half of 2014. A lower Yen helps exporters like Toyota which sells cars throughout the world. You can see in the chart below that Toyota’s stock has been inversely correlated with the Yen, as expected.
Toyota -TM (black) vs. Japanese Yen (blue) – 2 years
Lululemon is currently getting hammered (again) after a disappointing earnings announcement this morning. They lowered guidance for 2014 and announced the CFO will be stepping down. This is on top of the scuffle between the company’s founder (and largest shareholder) and the chairman of the board. I asked my wife about their staying power and branding (I’m certainly not the go-to person on women’s clothing) and she said that they still have the most “sexy and athletic” workout clothing and women at the gym are all still wearing and talking about Lululemon. It’s approaching interesting valuations down here for a long-term turnaround story and there’s always the possibility of someone stepping in to take the company private which would provide a very nice boost. You just want to make sure you’re not catching a falling knife too early so I’ll be watching the stock closely and may buy a little if things look right.
Lululemon Athletica
(LULU) – 2 years
Lastly, it was pretty big news yesterday that House Majority Leader Eric Cantor lost the Virginia primary election to Tea Party challenger David Brat. It appears that the Republican Party has been dividing over the past two years and I think this confirms it. It’s a natural trend to see people become more divided when an economy declines because they look for someone to blame and the finger-pointing begins. It’s also interesting to me that in the US we have primarily two political parties that dominate whereas in other countries, like many European countries, people and politicians are divided between a handful of parties that span the spectrum. We could be on the verge of seeing the Republican Party start to split into two groups: an ultra-conservative party (like the Tea Party) and a more middle-ground party (still called Republicans). Finally something interesting in politics…
-Nick
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