Chipotle Is Approaching Its 2009 Trend Line, Dead Cat Bounce?

By The Wall Street Fox Tuesday, January 12, 2016
In three short months, shares of Chipotle have dropped nearly 50% thanks to an e.coli outbreak, two separate norovirus incidents, and news of a criminal investigation into the company's handling of the virus outbreaks. Is a dead cat bounce possible?

Urgent Care conveniently located next to local Chipotle

Shares have approached their 2009 trend line and present an attractive risk/reward profile at current levels. With a strict stop loss set below the trend line at $395, and a price target of ~$487 (23.6% fib retracement level), this trade risks 2.3% for a potential of gain 20%.



Analysts compare Chipotle's e. coli outbreak to Taco Bell's 2006 e. coli outbreak. Sales at Taco Bell didn't recover for ~5-6 quarters. My gut tells me that it may be different for Chipotle, the food taste/quality does not compare. A negative impact on revenue is expected, but I don't expect it to take 1.5 years for the company to fully recover like it did for Taco Bell.

 
Revenue, net income, free cash flow growth has been up and to the right for eleven straight years. But, a sizeable drop in revenues and a longer anticipated recovery time for Chipotle are the risks to this trade, along with associated headline risk from the criminal investigation. A weak overall market environment doesn't help this trade either.

The Wall Street Fox

The Wall Street Fox utilizes fundamental and technical analysis to generate investment ideas. TWSF holds a MBA, and is currently preparing for the Chartered Market Technician (CMT) designation.

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