Money Matters - Simplified

Is Chipotle the Next Starbucks?

 One of the great maxims of traders and Wall Street pros is to follow the "smart money." I'm not much for the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

 

 Next up: Chipotle Mexican Grill (NYSE: CMG). Are institutions bullish or bearish when it comes to this quick-serve burrito baron?

Foolish facts

Metric

Chipotle

CAPS stars (out of 5) **
Total ratings 2,541
Percent bulls 87.6%
Percent bears 12.4%
Bullish pitches 384 out of 467
Highest rated peers Kona GrillCountry Style CookingDreams Inc.

Data current as of Nov. 27.

In the Beyers family, we know Chipotle well. Its restaurants are one of the few places serving safe quick-serve items for our food-allergic son, and the stock has been a huge winner for our portfolio, tripling over the past two and a half years. The run-up has more than a few Fools wondering if it's time to sell.

"Mr. Market has gotten a case of the munchies with this stock. The inevitable hangover will bring it back to reality. Good long term potential but not at this price," wrote Foolish investor comansense in explaining a recent short call in CAPS.

Fair point. There's no measure by which Chipotle shares look cheap. The stock trades for close to 50 times earnings, the richest multiple we've seen since March 2008, back before the recession torpedoed this and so many other stocks:

Institutional ownership history

Top Owners

2007*

2008*

2009*

Latest*

Fidelity Investments 2,737,950 4,112,365 3,105,982 4,074,417
T. Rowe Price Group 1,987,700 3,034,450 6,189,704 3,365,399
Capital Research and Management 4,031,030 4,204,527 2,510,732 2,585,732
BlackRock 158,630 75,680 1,556,725 1,492,287
The Vanguard Group 1,015,936 1,063,445 1,312,602 1,153,790
TOP 25 TOTAL 17,975,786 18,779,199 21,871,624 21,330,289

Source: Capital IQ, a division of Standard & Poor's. *Indicates the number of shares owned.

On the other hand, there's no denying Chipotle's extraordinary fundamental performance. Revenue is up almost 18% over the trailing 12 months. Normalized net profit is up more than 40% over the same period. Gross margin and returns on capital are rising.

All this and more points to a business that's executing extremely well, which may explain why Big Money investors have added to their positions on an annualized basis, despite legitimate valuation concerns.

Yet those concerns could also explain why recent institutional buying has been inconsistent. According to the quarterly numbers, the top 25 took some profit in the first half of the year, only to begin buying anew in September. They've purchased roughly 1 million more shares since.

Competitor and peer checkup

Company

Institutional Ownership

Insider Ownership

California Pizza Kitchen (Nasdaq: CPKI) 94.21% 9.21%
Chipotle 102.94% 1.89%
Red Robin Gourmet Burgers (Nasdaq:RRGB) 87.95% 9.67%
Yum! Brands (NYSE: YUM) 77.09% 0.44%

Source: Capital IQ. Data current as of Nov. 27.

As an owner, I'd love to see institutions keep buying. Yet that may be wishful thinking. Big Money investors already own more than 100% of the shares outstanding because of the effects of borrowing shares for shorting. Approximately 11% were sold short as of this writing.

Yet I can't see selling at current prices. Yes, Chipotle is overvalued by the numbers. Yes, institutional sponsorship is about as high as it's going to get. Yes, I realize we're talking about a burrito maker. Trouble is, investors made similar arguments against Starbucks (Nasdaq:SBUX) years ago, and it went on to become a megachain. Something similar may be happening here. I'm willing to hold and find out.

Now it's your turn to weigh in. Do you think the institutions are wrong about Chipotle? Let us know what you think using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.

© 2010 UCLICK L.L.C.