3 Reasons Why Investors Shouldn’t Panic

Chipotle Mexican Grill (NYSE: CMG) has been in the headlines lately for the wrong reasons. The biggest focus was the departure of the company’s respected CEO. But a rapid price drop of 20% is another worrying piece of information that is hard to ignore. If you’re a long-term growth investor, however, here are three reasons to stay positive on Chipotle stock.

1. Chipotle’s share decline is not unusual

Growth stocks have a habit of falling higher, retreating to consolidate those gains, and then rising again. It can be hard to hang on through the ups and downs, but for companies with a long growth trajectory ahead, it’s often the best course of action. With that in mind, Chipotle’s current price pullback isn’t exactly out of the ordinary for the company.

In fact, as the chart above highlights, this is the seventh pullback of 20% or more. Occasionally the stock dropped further, reaching 50% a few times and even 75% once. And yet, the current pullback has left the stock about 20% below its all-time high, which also happens to be a 52-week high. So this has been a steady climb up, with rapid downdrafts along the way. Or, in plain English, that’s how the stock moves.

Chipotle operates approximately 3,500 restaurants. Taco Bell, owned by Huh! trademarkshas around 8,500 locations. This suggests that in the long run, Chipotle could still double in size and not completely saturate its food niche.

2. Chipotle operates from a position of strength

Having plenty of room for more stores is one thing, but the bigger story is that Chipotle isn’t doing badly right now. In fact, they are doing extremely well. In the second quarter of 2024, same-store sales rose 11.1%. That’s a big number in the grocery sector, where single-digit same-store sales growth is considered good. Total sales, helped by new store openings, rose 18.2% to $3 billion. Again, that’s a pretty robust number for a restaurant.

To be fair, Chipotle probably can’t keep putting up numbers like this forever. So, reasonable investors should expect some decline in performance. Still, it would be hard to suggest that Chipotle’s business is doing badly today. In fact, it is performing at the top of its game, even if the share price would suggest otherwise.

3. Chipotle’s CEO leaves an organization behind

That brings the story to the biggest negative headline of the year, Chipotle’s CEO suddenly jumping ship to Starbucks (NASDAQ: SBUX). Brian Niccol was well-respected in the restaurant space and was credited with helping put Chipotle on a more solid upward trajectory. So maybe his departure is negative.

The story continues

However, although he ran a large business, he was not the only person running it. He leaves behind a team of hand-picked leaders and a business that works efficiently. The new CEO will have big shoes to fill, but this is not a turnaround situation or a company in need of a major refresh. Interim CEO Scott Boatwright was the company’s COO, so he knows the company well. And a high-level employee who recently announced his retirement agreed to stick around a bit to help out. All in all, Chipotle still looks like it’s in good hands.

Should you be keeping an eye on the company due to the departure of the CEO? Yes! Should you be upset that the end is near? Absolutely not.

Chipotle’s bumpy ride above

Growth stocks often traverse a bumpy road that leads steadily higher over time. That’s the story behind Chipotle so far, and there’s no particular reason to think the current pullback in the stock price will be any different than previous pullbacks. The company is performing well and its operations are good. Panic just doesn’t seem warranted by the facts at this point.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short September 2024 $52 put on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

Chipotle’s Selloff: 3 Reasons Investors Shouldn’t Panic was originally published by The Motley Fool