Chipotle Mexican Grill (NYSE: CMG) is one of the most recognized restaurant chains in the world. Its relentless focus on food quality and top-notch customer service have helped it build one of the most loyal followings among fast food companies.
With sizzling carne asada, tasty burritos, and fresh avocado, it’s hard not to enjoy a meal at Chipotle. However, the company has something new in store and it has nothing to do with food.
Chipotle’s board of directors recently approved a 50-1 stock split. Assuming the company’s shareholders add their approval on June 6, the split-adjusted shares will hit the stock market later this month.
Let’s take a look at how stock splits work and assess whether Chipotle stock is a buy right now.
Why is Chipotle splitting its stock?
As of this writing, Chipotle stock is trading for about $3,063. The all-time high stock price was about $3,200.
In general, when a stock starts hovering around record levels, buying activity can sometimes slow down. This is because investors view the shares as expensive and look for alternatives.
However, this behavior is based more on psychology than on the basics of investing. When a company undergoes a stock split, the number of shares outstanding increases by the specified ratio. At the same time, the stock price is reduced by the same proportion – therefore, the company’s market capitalization and valuations remain unchanged.
Nevertheless, Chipotle management believes that splitting its shares will make it more accessible and attractive to employees and retail investors.
Chipotle is a best-in-breed company
I wouldn’t be surprised if you have some hesitation when it comes to investing in restaurant stocks. Macroeconomic factors such as inflation and higher interest rates have taken their toll on consumer spending. As such, a business that relies on people’s willingness to pay for small indulgences such as takeaway food may not seem like the most attractive investment opportunity.
Chipotle has differentiated itself from some of its peers through investments in technology. The company makes venture capital-style investments across all areas of the food spectrum – from ingredient sourcing to sustainability and more. These investments have helped the company innovate its menu offerings, build a digital app and understand customer dynamics on a deeper level. As a result, the company is generating transformative growth in both revenue and profit.
While all of this is encouraging, there’s one more variable that’s important to unpack before making a decision on whether or not to buy Chipotle stock.
Should You Invest in Chipotle Stock Before the Split?
When a stock split is on the horizon, the question of whether to buy shares before or after it happens is a common conundrum for investors. Often, stock prices rise after a split as more investors rush in and buy up shares at a perceived lower price.
However, the lower price tag on the stock doesn’t mean you’re actually buying at a lower valuation. When momentum traders start acquiring the stock and the stock rises sharply, the market cap increases as well – meaning you’re essentially investing at a higher price than was available before the split.
This chart illustrates Chipotle’s price-to-earnings (P/E) ratio over the past five years. While the price-to-earnings ratio has normalized from the highs of a few years ago, Chipotle’s stock has historically been quite pricey compared to the broader market.
That said, long-term shareholders have been richly rewarded. Over the past five years, Chipotle has achieved a total return of 362%. In contrast, the Vanguard S&P 500 ETF had a total return of 107%. Zooming out further, Chipotle’s stock has returned 453% over the past decade, compared to the Vanguard S&P 500 ETF’s return of 228%.
All things considered, Chipotle has been a great investment, and I suspect the momentum will continue after the split later this month. Given the superior returns compared to price-tracking funds S&P500I’d say Chipotle’s premium valuation is justified.
I think it would be a wise strategy to pick up shares of Chipotle before the split. In the grand scheme of things, however, exactly when you buy this stock isn’t that important. Your investment thesis should be rooted in the company’s fundamentals and the belief that Chipotle can fend off competition.
Should You Invest $1,000 in Chipotle Mexican Grill Now?
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Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Chipotle Mexican Grill and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
Forget Carne Asada: Chipotle’s 50-for-1 Sizzling New Stock Split Is About to Be on the Menu for Investors was originally published by The Motley Fool
