Forget Carne Asada: Chipotle’s sizzling new 50-for-1 stock split will soon be on the menu for investors.
Would it be better to buy stock in the fast-casual Mexican food chain before or after the split?
Chipotle Mexican Grill (CMG 0.11%) It is one of the most recognized restaurant chains in the world. Our relentless focus on food quality and top-notch customer service has helped us build one of the most loyal customers of any fast food company.
With sizzling carne asada, delicious burritos, and fresh guacamole, you can’t help but enjoy a meal at Chipotle. But the company is brewing something new, and it has nothing to do with food.
Chipotle’s board of directors recently approved a 50:1 stock split. Assuming the company’s shareholders give further approval on June 6, the split-adjusted shares will be listed on exchanges later this month.
Let’s take a closer look at the stock split mechanism and evaluate whether Chipotle stock is a buy right now.
Why is Chipotle splitting its stock?
As of this writing, Chipotle’s stock is trading around $3,063. The all-time high was about $3,200.
Broadly speaking, buying activity can sometimes slow down when stocks start hovering around record levels. This is because investors perceive the stock as expensive and begin to look for alternatives.
However, this behavior is based more on psychology than on the basic principles of investing. When a company conducts a stock split, the number of shares outstanding increases by a specified percentage. At the same time, the stock price decreases by the same percentage, leaving the company’s market capitalization and valuation unchanged.
Nonetheless, Chipotle executives believe a stock split will make the stock more accessible and attractive to employees and retail investors.
Image source: Getty Images.
Chipotle is a leader in its industry.
When it comes to investing in restaurant stocks, we wouldn’t be surprised if you have some fears. Macroeconomic factors such as inflation and rising interest rates have taken a huge toll on consumer discretionary spending. Therefore, businesses that rely on people’s willingness to engage in small services, such as takeout meals, may not be perceived as the most attractive investment opportunities.
Chipotle has differentiated itself from some of its competitors through its investments in technology. The company makes venture capital-style investments in all areas across the food spectrum, from ingredient sourcing to sustainability and more. These investments helped us transform our menu offerings, build digital apps, and gain a deeper understanding of customer dynamics. As a result, the company is achieving breakthrough growth in both revenue and profits.
All of this is encouraging, but there’s one more important variable to unpack before deciding whether to buy Chipotle stock.
Should You Invest in Chipotle Stock Before the Split?
When a stock split is around the corner, the question of whether to buy stocks before or after the split occurs is a common conundrum for investors. Stock prices often rise after a split as more investors flock in to purchase shares at a lower cost.
But just because a stock has a low price tag doesn’t mean you’re actually buying it at a lower valuation. In fact, when momentum traders start taking stock and the stock rises rapidly, its market capitalization also increases. This means you are actually investing at a higher price than before the split.
CMG PE ratio data from YCharts.
This chart shows Chipotle’s price-to-earnings (P/E) ratio over the past five years. Although P/Es have normalized from their highs a few years ago, Chipotle stock has historically been quite expensive relative to the overall market.
That said, long-term shareholders have been handsomely rewarded. Over the past five years, Chipotle has achieved a total return of 362%. In contrast, Vanguard S&P 500 ETF The total return was 107%. To zoom in further, over the past 10 years, Chipotle stock has returned 453% compared to the 228% return for the Vanguard S&P 500 ETF.
All things considered, Chipotle has been a great investment and we think its dynamics will continue after the spinoff later this month. Considering that the rate of return is superior to that of the funds it tracks, S&P 500I would say Chipotle’s premium valuation makes sense.
I think it would be a smart strategy to acquire a stake in Chipotle before the split. But in the grand scheme of things, exactly when you buy these stocks doesn’t really matter. Your investment thesis should be rooted in the fundamental principles of the business as well as your conviction that Chipotle can beat the competition.
