Is it too late to buy Chipotle Mexican Grill stock?

Chipotle Mexican Grill (CMG -2.78%) it’s not a cheap stock, with a high price-to-earnings ratio of around 50 times. That’s after the stock has retreated about 25% from its all-time highs. But if you’re looking for a growth stock, now is probably the time to pay extra attention to Chipotle. The big news right now is the surprise departure of the company’s CEO. It might not be as bad as Wall Street seems to think.

Chipotle has a long history of big draws

It’s hard to suggest that now is the best time to buy Chipotle given the sheer level of its P/E ratio. But then, there’s never been a better time for this stock, which has long been given a premium over other large restaurant companies. That said, Chipotle’s current P/E is actually below its 10-year average P/E.

CMG data by YCharts

While this is definitely not a good choice for value investors, more aggressive growth investors may still be interested. There are several reasons for this. For starters, Chipotle’s stock didn’t go up in a straight line. He faced a series of material reductions of 20% or more. The current decline of nearly 25% is the seventh such pullback from the chart above. To be fair, the biggest reduction was around 75% and there is a big drop of around 50% in that percentage as well. So the current price decline could continue.

In fact, given the huge drop in the share price after the company’s CEO announced that he was leaving to lead the coffee giant Starbucks (SBUX 0.53%)it seems that investors are in a good mood. This makes sense, given that Brian Niccol was a highly respected leader in the restaurant space. However, instead of being worried, long-term growth investors should probably start getting more interested.

You didn’t exactly miss the boat at Chipotle

That said, it wouldn’t be wise to rush out to buy Chipotle right now. There are a lot of moving parts, including the appointment of Scott Boatwright as interim CEO, the return of a key high-level employee who had just announced his retirement, and the announcement of a new chairman of the board. However, all of these changes involve people who have been inside the company for years, so it’s not likely that Chipotle’s business will suddenly fall off a cliff.

In fact, Q2 financial results were particularly strong. Revenue increased 18% year-over-year, same-store sales increased 11%. Restaurant operating margin increased 140 basis points to 28.9%. Niccol is leaving a company that is doing quite well financially.

However, some issues need to be resolved. Niccol came in and made some dramatic changes to Chipotle’s business, including adding things like conveyor belts and digital ordering. These were necessary advances to keep the company in line with the times, but some industry observers suggested the company had taken its eyes off important fundamentals. The list includes value (there have been complaints about shrinking portion sizes), customer service and restaurant cleanliness.

CMG data by YCharts

Such issues, especially if accompanied by a return to more normal levels of business performance in the restaurant space, could lead to an even deeper decline in the share price. Fixing some of the issues mentioned above could be difficult because they are cultural in nature. However, there is no reason to believe that they cannot be repaired. And it gives the next CEO a place to start working. Basically, Niccol’s departure could be the catalyst that makes Chipotle refocus on its core after a period of dramatic change.

Don’t rush into Chipotle, but keep an eye on it

As mentioned, Chipotle is an expensive stock. In fact, only aggressive growth investors will likely want to own it. However, with the big drop in prices already and investor concerns about the recent change in the corner office, the stock could start to get more interesting from here. If more bad news comes out, such as same-store sales falling to more normal industry levels in the single digits, the stock could easily continue to fall. And that wouldn’t be at all inconsistent with historical price fluctuations here.

Now might not be the best time to buy Chipotle, but if the discount drops to anything close to 50%, you might want to consider buying a piece of the stock. Meanwhile, more aggressive investors might consider an entry position now, with the expectation of a moving average if the price decline continues. Indeed, there is bad news here. But so far, no news seems likely to permanently tarnish Chipotle’s brand, even as investors take an increasingly negative view of the company.