Wednesday, February 24, 2016

Two Days in the Life of Chipotle

I wanted to take a look at the last few days of trading in Chipotle Stock ($CMG) to try to see if I could gain any lessons from moves that at first seem had to understand.  

There is a long term story but I intend to focus on the short term.  I think most everyone who sees this will be aware of the general issues $CMG has had, namely, a very high valuation, falling stock, food and safety issues.  The stock reached $750 dollars in August and then fell to $400 at the peak of the hubbub over e coli concerns.  

Two days ago the stock had recovered to close at $525 on Monday, 2/22/16. The next morning, the stock received a prominent downgrade from Deutsche Bank analyst Karen Short (love the name) about the same issues that had been dogging the company.  The downgrade was to sell with a price target of $400.

OK, a major Wall Street name (should Deutsche really be from Wall Street?) downgrades, you would expect the stock to drop.  And bang, on Tuesday it did to $511 or so premarket.  Then it opened a bit higher than that, but still down.  Then, all day it started to rise and lo and behold, but the end of the day it was actually went “green” as they say, higher than it started.  It ends the day at $525 again.  The downgrade was, like, completely forgotten.  What the hell?

On Wednesday, the whole market craters when oil goes down, and Chipotle goes back to $512, and when the market reverses like a steamroller $CMG does like, nothing.  It ends at $514.  A roller coaster ride with nobody at the controls.  Or at least that’s the way it seems.

Now, these $10 moves seem pretty big, but they are only 2% moves because of the high share price.  Still, a 2% move day after day is substantial. 

I’m trying to understand.  Why does the downgrade impact share prices for maybe an hour?  There are some who believe that ratings changes are sinister, and that a downgrade is done in order to lower the share price so that the big boys can buy it cheaper (and the opposite for an upgrade so that the smart money can get out at a higher price.)  The conspiracy theorists would add that the large players knew the downgrade was coming so they could sell before it was announced. 

I don’t know whether to believe this, I like to think I am not that cynical.  But otherwise, I am at a loss to know why $CMG moved like this.  It just reinforces my belief that trading intraday moves is just gambling, and there’s little logic to it.   Others may have different ideas.  

Disclosure, I do have a option position on $CMG, looking for it stay near its current price.  

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