Should You Buy and Hold Chipotle?
Being able to retire rich, or at least comfortable, is the goal of almost any investor. However, it's much easier said than done. In a recent Wells Fargo survey, respondents between the ages of 50 and 59 said that they had, on average, about $29,000 saved up. With pensions all but gone, and Social Security targeted for cuts in the future, it's hard to count on anyone but yourself. But $29,000 isn't going to cut it for most people, so you've got to get involved in the stock market in order to grow that nest egg. Getting in the game is the easy part; choosing the right stocks is the hard part.
Making prudent decisions
Generally speaking, I look for four traits in a retirement stock:
- Valuation: Investors of all ages want to make sure they're not overpaying for a stock, but this matters even more in retirement. Retirees don't have the long time horizon that younger investors have, so it's essential to make sure you don't overpay in the short term.
- Dividends: Most retirees need a combination of both growth and income, as they'll be depending more and more on their portfolio to help with everyday expenses. Companies that pay dividends not only offer immediate income, but they've also proven to outperform non-paying dividend companies over long periods of time.
- Growth: Investors love dividends, but everyone wants to see their stocks rise over time. Growth can be as big a part of your portfolio as a steady dividend. It's important to note that you don't need a high-flying stock that's going to shoot to the moon; a company that can grow and outperform the market is hard enough to find, so steady growth is highly covetable.
- Low volatility: Retirees want to invest in great growth stocks just as much as anyone else, but they also want to be able to rest well knowing that their portfolio won't be taking them on a roller-coaster ride. At the end of the day, most retirees would rather own a sturdy company that lets them sleep at night than a company that whips up and down with the gyrations of the market.
Although some companies are definitely more geared toward retirees, which companies you choose to invest in will be dictated largely by what you already have in your portfolio. Small, mid, and large caps can all play a role in your investing strategy, so I chose to evaluate all varieties of stocks in this regular series.
So how does Chipotle stack up?
In order to check out the valuation of Chipotle (NYS: CMG) , we don't want to look at only its P/E ratio of 49.0. That may seem expensive, but really we don't know without looking at the ratio in historical context. Over the last five years, Chipotle's average P/E ratio has been 41.6, which is less than the current ratio. This suggests that investors may be paying more than they've had to in the past, so it's important to find out why the price tag might be a bit higher today.
Chipotle doesn't pay a dividend. Although we'd love to see the company pay one, it's still a relatively new company so it is most likely using its cash for future growth projects, which is not an awful thing.
Next, we want to ensure that Chipotle's stock has the ability to rise over the next five, 10, or 20 years. A company that's growing its net income has the best possible chance to see its share price rise over time. Of course, we can't predict the future, but we can look back to get an idea of how the company has performed in the past in order to try to ensure future earnings growth. Over the past five years, Chipotle has grown its net income by 34.2% annually. Fortunately, Chipotle has been able to grow its earnings over the past five years, and that's pretty significant considering all of the market turmoil in the last few years. Of course, this doesn't mean that growth will continue, but it's a great sign that the company can prosper in the face of difficulty.
One of the best measures of volatility is called beta. Beta measures the impact that the movement of the stock market will have on a particular stock. For instance, a beta of 1.0 signifies that Chipotle will move in tandem with the market; a beta of 2.0 means that the stock will move up twice as much as the general market, and vice versa. In this particular case, Chipotle has a beta of 1.2, which isn't necessarily outrageous, but it's not that low either. This beta falls in the grey area and it really depends on each individual investor to decide how willing they are to take on that added volatility.
Let's look at the competition
We've taken a look at Chipotle, and maybe you think it's passed all the tests, or maybe you just don't feel comfortable with the results. Either way, it's beneficial to see how a company stacks up in its industry, because it's just as important to understand a company's competitors as it is to understand that particular company. Here are Chipotle's stats when compared to three of its closest competitors:
5-Year Net Income CAGR
|McDonald's (NYS: MCD)||18.1||2.9%||15.2%||0.5|
|Yum! Brands (NYS: YUM)||21.3||2.0%||8.7%||0.9|
|Wendy's (NYS: WEN)||NM||1.7%||(49.5%)||1.1|
Source: Capital IQ, a division of Standard & Poor's.
Each company has traits to like and traits left to be desired. Either way, it's beneficial to look at the industry picture and not just Chipotle in isolation.
Of course, I can't decide for you whether this is the best stock for retirement, but it has passed 2 of the 4 tests, which shows this stock has promise. It doesn't necessarily mean this stock is a slam dunk, but it has shown its ability to reward shareholders and that means it could have a place in your portfolio.
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At the time this article was published Jordan DiPietroowns no shares mentioned here. The Motley Fool owns shares of Yum! Brands and Chipotle Mexican Grill. The Fool owns shares of and has created a ratio put spread position on Wells Fargo.Motley Fool newsletter serviceshave recommended buying shares of Yum! Brands, McDonald's, and Chipotle Mexican Grill.Motley Fool newsletter serviceshave recommended creating an iron condor position in Chipotle Mexican Grill. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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