1 Growth Stock Down 15% to Buy Right Now

Chipotle’s recent pullback represents a good buying opportunity for patient investors.

Chipotle Mexican Grill‘s (CMG 0.49%) stock closed at a record high of $68.55 on June 18. That whopping 15,480% gain from its split-adjusted IPO price of $0.44 back in 2006 would have turned a $1,000 investment into $155,800.

But over the past three and a half months, Chipotle’s stock price retreated 15% from its all-time high. That might seem like a shallow pullback compared to its previous gains, but it could be a great buying opportunity for three simple reasons.

A couple eats tacos together.

Image source: Getty Images.

1. Chipotle’s business is still growing rapidly

Chipotle initially carved out a growing niche between cheaper fast food chains and pricier full-service restaurants with its “fast casual” format restaurants. However, after several years of robust growth, its comparable restaurant sales nearly flatlined in 2015 and declined in 2016 and 2017. That abrupt deceleration was caused by tougher competition, the sluggish growth of its mobile app, and several widely publicized foodborne illness outbreaks over a relatively short timeframe at multiple Chipotle restaurants.

Under Brian Niccol, who took over as its CEO in 2018, Chipotle reversed that three-year decline by upgrading its mobile app, expanding its rewards program, and adding new grab-and-go ordering options. By collecting more data on its customers with its analytics tools, Chipotle optimized its menu and launched more effective marketing campaigns. It also halted its heavy discounts and promotions — which were originally aimed at winning back customers after its foodborne illness outbreaks — and poured its cash into fresh TV, social media, and digital advertising campaigns.

As a result, Chipotle’s comps growth stayed positive over the past six years, and it consistently opened new restaurants while expanding its restaurant-level operating margins. It also offset the inflationary headwinds over the past two years by repeatedly raising its prices and opening new drive-thru Chipotlanes to serve more customers.

Metric

2018

2019

2020

2021

2022

2023

Comparable restaurant sales growth

4%

11.1%

1.8%

19.3%

8%

7.9%

Year-end restaurant count

2,491

2,622

2,768

2,966

3,187

3,437

Restaurant-level operating margin

18.7%

20.5%

17.4%

22.6%

23.9%

26.2%

Data source: Chipotle.

From 2023 to 2026, analysts expect Chipotle’s revenue to grow at a compound annual growth rate (CAGR) of 14% as its EPS rises at a CAGR of 21%. That still makes it one of the fastest-growing restaurant chains in the world.

2. Chipotle can survive the loss of its star CEO

Chipotle suffered a major setback in August when Brian Niccol unexpectedly stepped down to join Starbucks as its new CEO. Chipotle’s stock slumped amid fears that its growth would stall out again without Niccol at the helm.

But Niccol was succeeded by Scott Boatwright, Chipotle’s chief operating officer since 2017, as its interim CEO. Boatwright implemented most of the bold turnaround strategies that lit a fire under Chipotle’s business over the past several years, and the company said he would “continue to execute” that “strategic plan without interruption.”

Chipotle’s CFO Jack Hartung, who had planned to retire next year, also plans to stay onboard “indefinitely” to assist Boatwright’s transition to the CEO role. In other words, Chipotle should maintain its momentum for the foreseeable future if it sticks with its current growth strategies — and investors shouldn’t overreact to the abrupt departure of its star CEO.

3. Chipotle’s macro headwinds are dissipating

Several macroeconomic headwinds have been holding back Chipotle’s stock over the past year. Inflation has been driving up its food and labor costs, and it will likely run out of room to raise its prices to offset that pressure. Rising interest rates, which are needed to tame inflation, also drove investors away from pricier growth stocks like Chipotle.

But looking ahead, inflation is easing and the Federal Reserve just cut its rates for the first time in more than four years. Therefore, investors should see a lot less macro-driven pressure on Chipotle’s margins and valuations. Its stock still isn’t a screaming bargain at 44 times next year’s earnings, but its robust growth rates could justify that higher valuation.

It’s still a great growth stock for long-term investors

Chipotle’s stock might remain somewhat volatile until a permanent CEO is chosen, but it has a bright future. Its comps are rising, its margins are healthy, and it is targeting an 8%-10% annual expansion in new stores for the “foreseeable future” as it expands overseas across Europe and the Middle East. So if you believe in its long-term growth potential, it’s a great time to pick up a few more shares.

Leo Sun 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 has a disclosure policy.

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