Down more than 16% since the stock split, should investors load up on Chipotle shares during this selloff?

On June 18, fast-casual chain Chipotle Mexican Grill (CMG 0.18%) underwent a 50-for-1 stock split, one of the largest in US stock market history. Stock splits are usually done to lower a company’s stock price and make it more accessible to more investors, so it was very timely for a stock that has been one of the best performers in years.

In the five years leading up to the stock split, Chipotle’s stock rose about 340%, significantly outperforming every major index during that time.

CMG data by YCharts.

Unfortunately, it hasn’t been all smooth sailing for Chipotle since its historic stock split, with the stock down about 16% since then. This decline was accelerated when it announced the departure of its CEO, Brian Niccol, who will take over at Starbucks starting in September.

Given the drop since the stock split and news of its CEO’s departure, investors may be wondering if Chipotle is still a stock to help. Let’s take a look.

Niccol left Chipotle in a great financial position

It’s one thing for a company to lose its chief executive when things are in turmoil; it’s another thing when it happens while the company is thriving. Fortunately, the latter is the case with Chipotle. Since becoming CEO in March 2018, Niccol has helped transform Chipotle from a company generating about $1.1 billion in revenue to $3 billion in the second quarter of this year.

With this increase in income came a healthy bank account. When Niccol took over, Chipotle had about $231 million in cash and cash equivalents. In its most recent quarter, that number was more than $800 million — even after spending more than $400 million in 2022.

CMG Cash and Equivalents (Quarterly) data by YCharts.

Chipotle’s financial health gives CFO Jack Hartung — who is now delaying retirement — a good foundation to ensure a smooth transition during this time. This should be reassuring to investors.

Chipotle’s growth momentum is going strong

Chipotle continues to open new restaurants at an impressive pace, including 52 new company-operated restaurants in the second quarter alone. The company does not open restaurants at the expense of its profit; manages to do so while becoming more profitable.

In Q2, Chipotle restaurant sales rose 11.1% year-over-year, and restaurant-wide operating margins increased from 27.5% to 28.9%. The ability to open new restaurants while simultaneously increasing margins shows that Chipotle is finding a sweet spot between growth and profitability, which isn’t always easy for restaurants. Sometimes restaurants sacrifice profitability in the name of expansion.

Chipotle management expects restaurant sales to grow in the mid to high range this year, helped by 285 to 315 new restaurant openings. If he can do that while continuing to improve margins, he’ll be in great shape.

Going all-in right now might not be the best approach

Even after its recent declines, Chipotle stock remains expensive by most standards. Its price-to-earnings (P/E) ratio is over 53, more than double restaurant giants such as McDonald’s and Huh! trademarks (owner of Taco Bell, Pizza Hut, KFC and The Habit Burger Grill).

That said, Chipotle is still much cheaper than it has historically been over the past five years. Its P/E ratio during that period averaged about 75, which is absurdly high.

There are questions surrounding Chipotle in the short term — including who will become its new permanent CEO and how they decide to run the company — but its long-term outlook hasn’t changed much. It’s a company with a lot of momentum that should continue for the foreseeable future.

My advice would be to use dollar cost averaging to invest in stocks. This allows you to start (or raise) a stake while ensuring you don’t go all-in and end up overexposed during this transition period.