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Another Buy Candidate: Chipotle Mexican Grill

 May 30, 2012 12:17 PM
 


Author: Michael Arold

Covestor model: Technical Swing

CMG is another stock on my buy list with compelling trading characteristics: as can be seen from the weekly chart, long term momentum is intact.

 

Source: MichaelArold.com

[Related -Texas Roadhouse Inc (TXRH): Beef Prices Rising - Who's At Risk?]

The stock has been outperforming the broader market for several years. The daily chart shows that bears are running out of steam: The stock declined 10% during the last six weeks, but each selling wave was accompanied by less volume.

On the other side, upside volume seems to have picked up recently: bulls are getting stronger, so I'm happy to join them.

In addition, relative strength vs. the S&P 500 improved in recent weeks.

Source: MichaelArold.com

[Related -Chipotle Mexican Grill, Inc. (CMG): A Pullback By This 'Cult Stock' Signals 'Buy']

In order to find a good entry, I look at the intraday chart. CMG seems to be in a transition process from downtrend to sideways/uptrend.

Source: MichaelArold.com

Two possible scenarios here:

  • A) The price breaks resistance around $410, so I would buy the intraday breakout with a stop around 400.
  • B) Further weakness and CMG becomes a buy on strong rebound from support around $390.

Fundamentally, the stock seems expensive, which others obviously have already figured out: CMG is heavily shorted with 16% of float held short. Analysts are neutral: only 14 of 27 analysts rate the stock a "buy", which is good since it leaves room for upgrades. The combination of high short interest with neutral analyst rating has no negative implications according to this piece of quantitative research.


Disclosure: Long CMG

Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.

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