Analysis: CMG

After you receive this Alert, we will initiate a new position in Chipotle Mexican Grill (CMG)  buying 50 shares at or near $1,626. Following the trade, CMG will account for roughly 2.0% of the portfolio.

As the stock market increasingly digests the potential impact of the Omicron variant, which appears to be milder than initially expected, we are using the effects of the recent Omicron-inspired selloff to pick up shares of Chipotle well below our $2,000 price target. We recently added CMG shares to the Bullpen, and spelled out our investment rationale for the shares.

Part of that rationale included management's use of menu innovations to drive traffic, both in-store as well as digital. Recently it was reported the company is testing a plant-based chorizo offering as well as a new spiced-up version of its chicken called pollo asado. These limited-time menu items, such as the cilantro-lime cauliflower rice and potentially the plant-based chorizo, serve to drive repeat customers and could help expand its customer base as well. More importantly, these limited-time offerings tend to have premium prices relative to the core menu, a positive for revenue generation.

Whenever we consider a restaurant holding, we'll be keeping close watch on labor as well as ingredient costs. In June, Chipotle announced a 4% increase in average menu prices to contend with these issues. As we saw in the September-quarter results, and visits to our own Chipotle locations, consumers seem to be taking those price hikes in stride.

Given the potential upside to our $2,000 price target from current levels, our initial rating on CMG shares is a One. In terms of a "buy up to range," we'd note at $1,725, CMG shares would have roughly 15% upside to that price target. All things being equal and based on today's perspective, if CMG shares were to pass through the $1,800 level, we would contemplate downgrading it to a Two rating.

In terms of the initial position size, we want to capture and take advantage of the recent selloff but also leave room to build out or position size either on lower prices or on signs the company's business is stronger than current consensus expectations.