Daily Archives: October 25, 2018

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Chipotle Stock Could Bounce On Strong Q3 Numbers

Fast-casual food chain Chipotle (NYSE:CMG) will report third-quarter numbers after the bell on Thursday, and I think those numbers will be good enough to spark a bounce-back rally in recently beaten up Chipotle stock.

The story here is pretty simple. After the recent correction, CMG is finally entering reasonably valued territory. Meanwhile, the stock is down more than 10% since the last earnings report. That combination of recent declines and reasonable valuation imply that if third-quarter numbers are strong, Chipotle stock could stage a meaningful rally.

I think that is exactly what will happen. The restaurant backdrop is exceedingly favorable right now. Macro research firms point to red-hot restaurant sales, while fast-casual peers have mostly reported strong third-quarter numbers recently. Also, it appears that Chipotle’s new initiatives with menu innovations and delivery are progressing nicely.

All in all, CMG looks attractive ahead of the third-quarter print. You have a really beaten up stock with a reasonable valuation heading into a report that should be pretty good. Put that all together and you could get a nice post-earnings rally in Chipotle stock.

Third Quarter CMG Numbers Should Be Good

There is a good chance that Chipotle reports above-consensus third-quarter numbers that impress investors. Why? Two major reasons. One, the whole restaurant industry is on fire right now. Two, Chipotle’s strategic menu innovation and delivery initiatives are doing well.

With respect to the first reason, there is little doubt out there about the strength of the U.S. restaurant industry at the present moment. According to research firm TDn2K, the restaurant industry saw its biggest sales and traffic growth in three years during the third quarter. Meanwhile, retail sales at food services and drinking places were up a robust 8.8% year-over-year during the past three months.

This strong macro data is corroborated by what has been a string of positive earnings reports from fast-casual chains. Most of those chains that have reported third-quarter numbers so far have reported strong double-beat-and-raise quarters, headlined by McDonald’s (NYSE:MCD), Dunkin’ (NYSE:DNKN) and Darden (NYSE:DRI).

Broadly speaking, then, the whole restaurant industry has beenperforming extremely well. It is reasonable to assume that this is a rising tide that lifted all boats, Chipotle included, especially considering it has been largely (but not entirely) out of the spotlight recently when it comes to health scares.

Moreover, CMG’s strategic initiatives in menu innovation and delivery were smart moves, and I have faith those initiatives continued to yield material benefits this past quarter. Menu innovations keep customers interested and attract new customers, and Chipotle kept up the menu innovations in the quarter (earlier in the quarter, they were testing bacon and nachos). On the delivery front, Chipotle stock has deepened its partnership with Postmates, and that is a good thing as it extends reach.

If the report is as good as these developments suggest, you could get a nice post-earnings pop in Chipotle stock.

Chipotle Stock Could Pop

Chipotle stock could pop on strong third quarter numbers for two reasons. The valuation has depressed into reasonable territory, and the stock has been beaten up since the last earnings report, implying low buy-side expectations.

On the valuation front, the simple truth about Chipotle stock is that at $250, it was way undervalued, and at $500, it was way overvalued. This is a company which is on a steady, but not explosive, sales recovery trajectory.

Meanwhile, margins will continue to be pressured by lower unit performance, higher wages and new initiatives spend. Thus, in the big picture, the Chipotle profit recovery is happening, but not quickly. Under those assumptions, this is a company which I think can do about $30 in EPS in five years. Throw a McDonald’s-level 20X forward multiple on that, and discount back by 10% per year. You arrive at a 2018 price target of $450.

Thus, at $250, Chipotle stock was undervalued. At $500, it was overvalued. Now, at $420, it is reasonably valued.

Meanwhile, Chipotle stock is down more than 10% since the last earnings report, and more than 20% off recent highs. That means buy-side expectations for Q3 are low. With expectations low and the valuation now in reasonable territory, Chipotle stock is positioned for a nice rally in the event Q3 numbers are strong.

There are reasons to be cautiously optimistic on Chipotle stock ahead of the Q3 print. You have a beaten up stock with a reasonable valuation heading into a Q3 print which could be quite good. That set-up implies that in the event of good numbers, Chipotle stock could stage a healthy rally.

As of this writing, Luke Lango was long CMG and MCD. 

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Buy These 3 High-Yield Stocks to Protect Yourself From the Next Recession

The prediction drums of the financial news media continue to grow in volume with predictions of the next economic recession and possible stock bear market. You are probably starting to wonder if these predictions are accurate and if you should make changes in your investment portfolio.

The fact is the economy will go into a recession at some point. The growth and recession cycle of the economy remains intact. The challenge is that no one can accurately predict when the next recession will arrive. You can help your portfolio for when the next downturn will hit with some defensive stock picks.

Keep in mind that a recession is a period of negative economic growth. It is not an economic collapse. Many companies will continue to do well through the downturn. The companies and stocks at risk are those dependent on either strong economic growth or have high debt loads that will crush profits if a company experiences even a minor slowdown in revenue.

Related: 3 Recession Proof High-Yield Dividend Stocks

An economic recession will likely trigger a bear market in the stock market. You can’t avoid a stock portfolio value drawdown, but you want to own shares of companies that will not be negatively affected by the slower economy. Earning dividends through a market drop and recovery helps you come out of the next recession ahead of the game.

I personally think we are two to three years or longer out from the next economic slowdown. I could be wrong. If you believe the next recession is right around the corner, or out in the more distant future, it would not hurt to have some dividend paying, recession resistant investments in your portfolio. Here are three to consider.

When the economy runs into trouble, it most effects individuals who can lose jobs, see pay cuts, or even not be able to make house payments. Young workers may move back in with their parents. These individual problems are good for the local self-storage locations.

Extra Space Storage (NYSE: EXR) owns or manages almost 1,600 self-storage properties with 115 million rentable square feet. EXR is a real estate investment trust, which means it must pay out the majority of net income as dividends to investors.

This company is conservatively managed, with a focus on growing the dividends paid to investors. The EXR dividend has grown by a compounded 12% annual rate over the last decade. In a recession, Extra Space will be able to keep its properties fully rented and also be able to buy additional properties that are less well run.

EXR currently yields 4.0%.

Even in tough times people will find the money to pay their utility bills. Utility stocks are viewed as a safe haven by stock market investors, and the belief is justified.

These are the highly-regulated companies that provide electric power, natural gas, and water to homes and commercial customers. The regulatory agencies approve the rates a utility charges. Rates are set so that the utility can cover the infrastructure spending to maintain and upgrade its assets and then earn a fixed rate of return above the necessary capital spending. The locked in regulated profit margins gives a high level of cash flow predictability.

More recession protection: Buy This 8.4% REIT That’s Raised Dividends Every Quarter

For this market sector I like the Reaves Utility Income Fund (NYSE: UTG). This is a closed-end fund that owns a diversified portfolio of utility and related stocks. Reaves Asset Management focuses only on utility and infrastructure stock investments.

UTG has paid a dividend every month since it launched in 2004. That means it operated through the last recession and bear market. The dividend has never been cut and has been increased 10 times.

UTG currently yields 7.0%.

Grocery stores are another recession proof industry. To cover this industry and earn dividends, I like REITs that earn most of their revenue from grocery store anchor tenants.

Brixmor Property Group (NYSE: BRX) owns 471 open air shopping centers. The company focuses on centers that are the center of their communities. Anchor tenants are the main revenue drivers for Brixmor, and over half of those tenants are grocery stores.

The REIT pays out just 54% of FFO, meaning the dividend is secure. The payout to investors has grown by 7% per year.

Current yield is 7.0%. This grocery focused REIT could just help you pay for the groceries through the next economic recession.

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