We recently published a list Analyst Recommends 10 Best Stocks to Diversify Your Portfolio Away from Mega-Cap Tech and AI Stocks. Since Chipotle Mexican Grill Inc (NYSE:CMG) ranks 8th on the list, it deserves a deeper look.
Venu Krishna, Head of U.S. Equity Strategy & Global Equity Linked Strategies at Barclays, recently shared a basket of stocks he recommends offsetting the risks that come from market concentration in big tech stocks. In an interview with CNBC, Krishna emphasized that he remains inclined towards big tech stocks, but the important question he addressed is which stocks offer more value outside of the tech sector in the long term.
Krishna’s methodology to find some of the best stocks outside of the tech sector is simple: find out at what “core fundamental” metrics big tech stocks are “excelling” at and then “try to come close to that and create a portfolio which can give us that kind of exposure.” Through this methodology, Krishna says, he came up with a well-diversified portfolio of stocks that could act as a “hedge” against market concertation in big tech.
Krishna said he applied “liquidity filters” on the whole market to remove a “bunch of companies” and narrow down to stocks with strong growth and FCF multiples.
Despite him pointing out the concentration of gains problem, Venu Krishna believes the rise of big tech stocks is a “healthy trend” and some of the gains are now bifurcating to other sectors, too.
However Krishna said that over the past 18 months his portfolio of stocks has lagged behind the Big Tech, but outperformed equal-weighted S&P 500 and market cap-weighted S&P 500.
For this article, we took a look at Krishna’s latest basket of stocks to offset concentration in big tech risks and picked 10 stocks with the highest number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
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Chipotle Mexican Grill, Inc. (NYSE:CMG)
Number of Hedge Fund Investors: 60
Chipotle is one of the stocks Barclays analyst Venu Krishna believes could offset the tech concentration risks.
In April, Chipotle Mexican Grill Inc (NYSE:CMG) posted strong Q1 results, which showed revenue in the period jumped by 13.9% on a YoY basis, beating estimates by $30 million. Comparable sales in the quarter increased by 7%. For the full year, Chipotle Mexican Grill Inc (NYSE:CMG) expects its comp sales to grow in the mid to high-single digit range. Chipotle Mexican Grill Inc (NYSE:CMG) has been steadily increasing its footprint over the past several years. Back in 2007, the company had just 704 stores. This figure now stands at 3437. One of the biggest signs of Chipotle Mexican Grill Inc’s (NYSE:CMG) strengths is its rising margins, even when the restaurant industry is reeling from high labor costs and squeezing margins. Chipotle Mexican Grill Inc’s (NYSE:CMG) current net margin of 12.45% is the highest it has been in the past decade.
Chipotle Mexican Grill Inc (NYSE:CMG) trades at 47X 2025 EPS estimate of $66.92 set by Wall Street analysts. This P/E is much higher than the industry of 16. Chipotle Mexican Grill Inc (NYSE:CMG) is expected to see revenue growth of just 13-15% per year over the next 3 years, while its EPS growth is expected to come in between 3% to 20%. Analysts expect the American consumer to remain prudent in spending amid higher for longer interest rate scenario and dwindling savings. Therefore, for investors looking for high-growth stock appreciation names, Chipotle Mexican Grill Inc (NYSE:CMG) might not be the ideal choice.
Average analyst estimate for Chipotle Mexican Grill Inc (NYSE:CMG) is $3244.77, which presents just 3% upside potential from the current levels. That means the Wall Street believes the stock has reached its potential and based on current catalysts and growth trajectory it does not have any room to grow significantly.
Rowan Street Capital stated the following regarding Chipotle Mexican Grill, Inc. (NYSE:CMG) in its first quarter 2024 investor letter:
“The best investment ideas are simple. We have previously written about Chipotle Mexican Grill, Inc. (NYSE:CMG). It turned out that this was our best investment idea since starting the fund. The stock is up 10x since we first invested at the end of 2017 (~47% annualized). Sounds absolutely incredible, except that your managers sold CMG back in 2018 (thinking that the stock had gotten ahead of itself), and proudly booked an 85% profit in 6 months, patting ourselves in the back. Interestingly, when we wrote about this in our 2019 letter, describing our big mistake to sell, the stock still went up +270% since that letter, delivering an impressive 30% annual return. This is an incredibly important point! You do not get many Chipotles in your investing career. Companies like these are super rare and the opportunity to buy them at an attractive price (which we got in 2017) is even rarer. Booking a quick profit, paying the capital gains tax and thinking that you will find another CMG to invest your proceeds into is usually delusional.
Along with our personal investment case of CMG, let us compare that to the experience that Bill Ackman had with the same investment. He is a famous hedge fund manager that we greatly admire, who has achieved an incredible track record in the past 20 years running Pershing Square. Bill Ackman has owned the restaurant stock since the third quarter of 2016 at an initial cost basis of about $411 per share (our cost basis was $289). Originally, Mr. Ackman bought 2.88 million shares. He was wise to hold on to CMG stock and it still is the top position in his fund (18% weight). But, if you follow his 13F filings, which are the public filings disclosing large investment manager’s holdings of publicly traded securities, he kept trimming his position as the stock went up. We calculated that if he just sat on his original 2.88 million shares and didn’t sell a share, his position would be worth $8.8 billion today. This would represent ~50% of his entire firms’ assets under management (AUM). But he only has $1.8 billion invested in CMG as of Q1 2024. As Charlie Munger said: ““The first rule of compounding is to never interrupt it unnecessarily.”…” (Click here to read the full text)
Overall, Chipotle Mexican Grill Inc (NYSE:CMG) ranks 8th on Insider Monkey’s list titled Analyst Recommends 10 Best Stocks to Diversify Your Portfolio Away from Mega-Cap Tech and AI Stocks. While we acknowledge the potential of Chipotle Mexican Grill Inc (NYSE:CMG), our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than Chipotle Mexican Grill Inc (NYSE:CMG) but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.