Chipotle Stock Beat Analyst Estimates Again … Now Sell!

Chipotle (NYSE:CMG) again confirmed it remains on a growth path in its fourth-quarter earnings report. The Denver-based restaurant chain handily beat revenue estimates. It also came in ahead of expectations when accounting for one-time costs. This sent Chipotle stock surging higher in morning trading.

CMG stock has put the health-related scares behind it. Customers have returned to the stores, and growth rates remain elevated. However, given its momentum and lofty valuation, investors should consider selling into this news.

Chipotle Stock Beat Revenue, Adjusted Earnings Estimates

For the fourth quarter, the company reported income of $1.15 per share. That amounts to a decline from the same quarter last year when CMG earned $1.55 per share. However, when one-time costs such as store closures and restructuring are not included, earnings came in at $1.72 per share. This figure exceeded consensus estimates of $1.37 per share.

CMG also earned $1.23 billion in revenue during the quarter. This beat analyst expectations of $1.194 billion and showed a 10.4% increase from last year’s levels. Comparable sales grew by 6.1% over the same period.

Traders reacted favorably to this news as Chipotle stock rose by nearly 15% in morning trading. As a result, CMG stock trades at its highest level since the E. coli scare of 2015 began a steep decline in the stock. At that time, multiple stories calling the restaurant chain’s cleanliness into question hammered CMG. Over the following two years, investors would see the stock lose almost two-thirds of its value.

However, Chipotle stock finally began its turnaround in late 2017. Since that time, it has more than doubled in value. As a result, concerns have shifted from health scares to multiples. Seeing the stock around the $600 per share could lead to questions about whether the move higher has run its course. The forward price-to-earnings (P/E) ratio has risen to around 50, while the current P/E has risen above 88.

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Growth, Issues Don’t Justify the Current Multiple

CMG has traditionally traded at high multiples. Moreover, the expected profit growth of 40.3% for fiscal 2019 could help justify such a forward P/E ratio. However, analysts expect profit growth will average 27.2% in the coming years. While still impressive, it may not justify its current valuation.

Furthermore, the health scares of a few years ago still weigh on investor’s minds.  They may trust their local Chipotle enough to keep eating there. Still, they might feel that a scare at a different Chipotle could inspire another round of selling in the equity. I do not see another decline of over 65% in CMG’s future. However, it could easily make investors think twice about paying a premium valuation when another health scare could loom over Chipotle stock.

Also, as our own Luke Lango points out, competition also looms over the stock. The trend toward healthy fast food has driven many to choose Chipotle over fast food Mexican restaurants such as Taco Bell, a YUM! Brands (NYSE:YUM) restaurant. However, with even McDonald’s (NYSE:MCD) embracing healthier ingredients, Chipotle’s peers could take more of its business.

Prospective buyers need to keep CMG’s problems into perspective. Customers returned to Chipotle despite the health scares. Moreover, few restaurant chains benefit from 27% long-term growth forecasts. If Chipotle stock falls back, investors should consider buying. Still, at more than 88 times current earnings, investors should look elsewhere right now.

Concluding Thoughts on Chipotle Stock

Despite CMG’s high growth and robust sales, stockholders should consider selling Chipotle stock. To be sure, the health issues of previous years appeared to stop weighing on the stock in late 2017. Since then, CMG stock has more than doubled in value.

However, a high valuation coupled with increased competition could make sustaining this momentum difficult. Moreover, consumers may still hold more trust in their neighborhood Chipotle than on the company at large. While that may not hurt company revenue, it could easily make investors think twice about paying a premium price for Chipotle stock. Considering the company’s history as well as the pricey multiple, investors should do their thinking twice now, not later.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter

2 Crazy Acquisitions That Would Boost Alphabet Stock

On Wednesday, yours truly penned some thoughts about the best way for Apple (NASDAQ:AAPL) to deploy its jaw-dropping $245 billion cash hoard. But Apple is hardly the only outfit sitting on a mountain of money. As of the end of the third quarter, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) boasts $115 billion in the bank, and the owners of GOOGL stock probably want the company to put some of that cash to work.

On the other hand, they clearly don’t want the company to make acquisitions just for the sake of making deals. But even the owners of Alphabet stock recognize there’s only so much upside to be reaped by reducing the number of outstanding shares of GOOGL stock. There comes a point where the smart and correct action is investing excess cash in a new growth engine.

Click to Enlarge Source: Shutterstock

The question is, what sort of new growth engine or engines should GOOGL consider buying?

Apples And Oranges

The knee-jerk reaction might lead one to name Netflix (NASDAQ:NFLX) or Disney (NYSE:DIS),which I called on Apple to buy,as the obvious pickups for Alphabet, though they’re not necessarily the best fit for GOOGL.

The 1.4 billion active iOS devices represent a ready-made, loyal user base that’s eager to do more with its hardware. Alphabet, conversely, is still mostly a tollbooth to the internet, fielding roughly two-thirds of web queries in the United States.

While GOOGL is also the name behind Android, which powers more than 85% of the world’s smartphones, Android and iOS for mobile devices are like apples and oranges. Apple is only promoting devices it makes, so it controls the entire user experience. Google wants Android everywhere, and has made it easy for any developer to plug into.

AAPL has also already committed to selling entertainment that it has developed through its iTunes store. Alphabet has no experience or apparent interest in content creation.

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As a result, neither Disney nor Netflix would be a smart fit for Alphabet.

So what takeover targets might be worth Alphabet’s money and time? Two surprising possibilities come to mind.

The Two Deals

To be clear, bolstering the stock-buyback program isn’t a poor use of Alphabet’s cash. It’s still in the midst of a more-than-$8 billion buyback of GOOGL stock that was announced early last year, in fact. don’t be surprised if that program is expanded when the company reports its fourth-quarter results after the close today.

If Alphabet really wanted to do something bold to build its business, though, it might want to acquire Square (NYSE:SQ), or FireEye (NASDAQ:FEYE), or both.

Don’t scoff until you hear me out.

You probably know about Square. It’s the company that turned the smartphone into a credit-card acceptance device with just a small, cube-shaped attachment.

It’s more than just a one-product outfit now, though. It’s developed what are essentially cash registers that also serve as customer-relationship and inventory-management devices. In the meantime, Square is slowly but surely morphing into a full-blown fintech company, an area where Google is falling behind.

SQ is also now the owner of website-building platform Weebly.

That needs to be repeated. Square now owns Weebly, which helps small businesses develop a web presence, and often, an e-commerce presence. Those businesses represent another swath of potential customers for Google’s ad business.

As for FireEye, it may not be as recognizable to consumers, but to enterprises that rely on the internet to conduct business and manage digital information, it’s a well-respected organization.

FireEye, in the simplest terms, offers a suite of cloud-based cybersecurity tools. It got off to a slow start, but its launch of a subscription-based product called Helix a couple years back has struck the right chord with its customers. Helix would be an easy bolt-on addition to Alphabet’s existing cloud services.

GOOGL could easily acquire both companies without blinking. Square’s current market cap is a relatively modest $29 billion, and FireEye has an even more affordable market cap of $3.5 billion. Not only would GOOGL stock not be diluted, but the bulk of Alphabet’s cash reserves would remain intact… even after including a premium in any offer.

Better still, both targets would soon make positive contributions to Alphabet’s operating earnings. FireEye is expected to swing to its first full-year profit when it finally posts its Q4 numbers, and Square is already profitable on a non-GAAP basis.

Looking Ahead for GOOGL Stock

Each deal would bring something to the table that Alphabet doesn’t already have, as well as bring something to the table that Alphabet could readily enhance. Potential synergies abound.

Unfortunately for the owners of Alphabet stock, neither deal seems likely to happen, as Alphabet’s preference is doing less rather than doing more. Most of its deal-making is reserved for smaller pickups that largely go unnoticed.

The company’s biggest deal of late was the purchase of some HTC assets in 2017, but even then, the $1.1 billion that GOOGL shelled out for the technologies that became the Pixel smartphone we know and love today was relative chump-change.

Still, it’s fun to hypothetically spend someone else’s money.

As of this writing, James Brumley held a long position in FireEye. You can follow him on Twitter

3 Stocks Warren Buffett May Wish He Could Buy

Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) holds tens of billions of dollars in cash and currently sports a market cap near $500 billion. Those gargantuan numbers limit Berkshire's investment universe to only the largest and most liquid stocks.

This is a "problem" that Berkshire's Warren Buffett has openly acknowledged for years. He has said numerous times that "a fat wallet is the enemy of high investment returns," meaning that he can no longer buy smaller businesses that have big growth potential, no matter how attractive they might be. 

So which businesses would interest Buffett today if he didn't manage so much money? I think Axon Enterprise (NASDAQ:AAXN), Q2 Holdings (NYSE:QTWO), and EPAM Systems (NYSE:EPAM) would be his kind of companies.

Image source: Getty Images.

Axon Enterprise

Axon Enterprise is a business focused on nonlethal law enforcement. The company boasts a near monopoly in three growing markets. The two that you are probably most familiar with are its TASER stun guns and its body cameras. These products currently represent the lion's share of Axon's revenue and are growing nicely as they gain popularity.

However, what makes Axon such an attractive "Buffett business" is its growing Evidence.com software-as-a-service segment. Whenever data is captured on one of Axon's cameras, it can be uploaded to Evidence.com for storage, analysis, and even sharing with other police forces.

The great news for investors is that police forces are charged a monthly subscription fee to use Evidence.com. What's more, it would be a huge burden for a police force to change providers because they would risk losing all of that data in the transfer. This makes the company's revenue very sticky.

Axon's near-monopolies in stun guns, body cameras, and police data storage provide it with a wide and durable moat that Buffett would appreciate. Better yet, the need for law enforcement is immune to the economic cycle, which helps Axon to produce profits in nearly any market condition. 

So why wouldn't Buffett be interested in Axon? The primary reason is that the company's market cap is under $3 billion. That makes it too small to matter. 

Q2 Holdings

Buffett currently holds substantial positions in Wells Fargo, Bank of America, and U.S. Bancorp, so it is obvious that he finds the banking industry attractive. One small-cap "banking" stock that I think he could learn to love is Q2 Holdings. 

Q2 is a software-as-a-service company focused on the needs of small banks. Most modern banking consumers want to be able to transact online. However, small banks often lack the resources to develop the technology to meet these needs. That's where Q2 comes in. It can partner with nearly any bank to allow it to grow its technological offerings without having to develop the products in-house. Q2's software can help a small bank take advantage of features like online bill pay, mobile deposits, and more.

Small banks have been flocking to Q2 for years. This has allowed the company's revenue to consistently grow at a 20% rate and for its net loss to shrink (it's actually profitable on a non-GAAP basis). With thousands of banks out there to target, I think that Q2 can keep up this pace for years.

For investors, the beauty of Q2 is that small banks become heavily dependent on the company's services once they become customers. That dependency leads to recurring revenue and pricing power that the company can use to reinvest in itself and expand margins.

In total, I'm convinced that Buffett would find Q2 Holdings to be an attractive investment opportunity. However, the company's market cap of just $2.5 billion is way too small for him to even bother.

EPAM Systems

Nearly every business relies on software to function. However, not every project can be handled by off-the-shelf software. Lots of companies need to create custom software to fit their specific needs, which is a problem since they often lack the technical expertise to create it on their own.

EPAM Systems has been solving this problem for decades. EPAM is a leading provider of software engineering, design, and IT consulting services around the world. The company employs thousands of experts who can be hired on a moment's notice to complete any project that its clients can dream up.

For investors, that flexibility has translated into stellar long-term financial results. A key reason is that EPAM does a fantastic job at winning new business while it simultaneously expands its relationship with existing ones. In fact, EPAM's top 10 clients have been customers for an average of 10 years.

That dependable book of business means that EPAM has visibility into more than 90% of its revenue at the start of any year. The company's knack for winning new business has helped drive organic revenue growth of more than 20% annually for 31 quarters in a row.

If the company's stellar financials weren't enticing enough, I'm sure that Buffett would appreciate that EPAM's founder Arkadiy Dobkin is still in the corner office. Dobkin boasts a long track record of creating shareholder value and still owns 5% of shares outstanding. That aligns his incentives perfectly with shareholders.

It's possible that EPAM's market cap of $7.5 billion might be big enough to entice Buffett to make an investment. But swallowing this business whole wouldn't impact Berkshire all that much. Either way, I think this is a great stock for buy-and-hold investors to get to know.