Under industry regulations, large investment firms are required to disclose their portfolio holdings on a quarterly basis. This is a gold mine for retail investors, as they can search large numbers of positions for potential buying opportunities.
Bill AckermanThe billionaire hedge fund manager who runs Pershing Square Capital Management is a popular investor. As of September 30 last year, his firm held a 13% stake in a booming company, a stake Ackman has held since 2016.
this top restaurant inventory It has soared 91% in the past two years alone. Is it time to buy stocks?
Ackman's investment philosophy is to own competitively advantaged businesses that possess numerous positive characteristics that benefit long-term investors. He also tends to focus on consumer-facing businesses.
Enter Chipotle Mexican BBQ (NYSE:CMG)a Tex-Mex pioneer known for its fast service, simple menu and consistent food. Pershing Square first bought a stake in 2016, a contrarian move considering Chipotle was still dealing with the fallout from a horrific E. coli outbreak at some of its restaurants.
However, the bet worked out well. One reason is growth. Chipotle's revenue in the third quarter of 2024 was $2.8 billion, up 100% from the same period five years ago. This is a clear indication of its popularity among consumers.
What's more, having a sizable revenue base gives Chipotle some cost advantages. This is especially true when sourcing key food inputs, marketing spend and technology investments that can be used to expand store size, as well as trying to acquire attractive real estate.
In addition to the consistent stability Same store sales No doubt this revenue growth was also driven by new store openings. Chipotle expects to add a net 300 new stores last year, bringing its total to more than 3,700 stores. The business is on track to one day have 7,000 stores in North America, which is management's stated long-term goal.
To be sure, based on Chipotle's trajectory, achieving this goal is a realistic outcome. This could lead to years of revenue growth.
The problem for new investors is that Chipotle's runaway success is no secret. The stock continues to move higher, leading to a sharp increase in valuation. The current trading price of the stock is Price to earnings ratio (P/E) 54, more than double the previous number S&P 500 Index.
Some investors may be perfectly willing to pay such a high valuation for what they consider to be a high-quality business. As mentioned, Chipotle's growth has been phenomenal. It's easy to believe that this will continue in the coming years. The business is also very profitable, with an operating margin of 16.9% in the third quarter. This figure is up from 8.2% in the third quarter of 2019.
Chipotle's proven performance drives this profitability pricing powerwhich legendary investor Warren Buffett calls a leading indicator of quality businesses. The management team has raised menu prices several times in recent years to combat inflationary pressures. However, based on sales trends, consumers continue to find great value in its menu items.
As of Sept. 30, Chipotle accounted for 13% of Ackman's Pershing Square portfolio. Even after the sharp price increase, he doesn't think the valuation is high enough to warrant an outright sale of the stock, although he has cut the stock's valuation in recent quarters.
However, I hold a different view. No business is so good that investors should completely ignore valuation. Paying a high P/E ratio not only means there is no margin of safety, but it also creates a significant hurdle that needs to be cleared in order to generate adequate returns on investment over the next few years. Chipotle is the best stock to keep on your watch list right now, at least until there's a big pullback.
Before buying Chipotle Mexican Grill stock, consider the following factors:
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Neil Patel and his clients have no positions in any of the stocks mentioned. The Motley Fool has a position and recommends Chipotle Mexican Grill. The Motley Fool recommends the following options: Short the December 2024 Chipotle Mexican Grill $54 put. The Motley Fool has a disclosure policy.
1 Incredible billionaire stock up 91% in two years: Is now the time to buy? Originally posted by The Motley Fool