This Just In: More Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.

So perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. With a little help from our Motley Fool CAPS supercomputer, we help you to track the long-term performance of Wall Street's best and worst.

And speaking of the best ...
A few days back, TheWall Street Journal ran a column laying out the case for buying shares of chicken-hawker Buffalo Wild Wings (NAS: BWLD) rather than north-of-the-border burrito-meister Chipotle Mexican Grill (NYS: CMG) . As the Journal explained, for all that its burritos are undeniably affordable (and ridiculously delicious), a share of Chipotle at 39 times forward earnings costs much more than an equivalent share of Buffalo Wild Wings. The paper argued that with similar expansion prospects and similar growth rates, investors are better off buying BWW today and leaving Chipotle on the Grill.

Considering how popular Chipotle is among consumers, that's a pretty surprising assessment. But it wasn't the most surprising thing we learned this week. The most surprising thing we learned was the apparent revelation that ace stock investor Sanford Bernstein doesn't read TheWall Street Journal -- because yesterday, against the Journal's clear instructions, Bernstein told investors to buy Chipotle.

Make a run for the border (no, the one thatactually puts meat in its tacos)
Initiating the shares at "outperform" yesterday, Bernstein predicted that shareholders could be dining on a 24% profit within a year, as the shares soar to $410 and beyond. But how likely is that scenario, really?

At first glance, I have to say that the prospects for profiting from Bernstein's prediction look pretty good. Long ranked in the top 10% of analysts we track on CAPS, Bernstein sports a perfect record of 100% accuracy on the restaurant picks it's made public:


Bernstein Rating

CAPS Rating
(out of 5)

Bernstein's Picks Beating S&P by

Starbucks (NAS: SBUX)



123 points

McDonald's (NYS: MCD)



69 points

Darden Restaurants (NYS: DRI)



17 points

Brinker (NYS: EAT)



17 points

Four swings, four hits. Bernstein's so far proved itself literally infallible (for now) in the restaurant industry. Yet call me a skeptic, call me a Fool, but I just can't see myself supporting its latest bullish call on Chipotle.

Why not? You guessed it: The numbers don't work.

Valuation mattersYou see, The Wall Street Journal is right about the relative merits of Chipotle and Buffalo Wild Wings. Next to B-Dub, Chipotle does look awfully expensive at 39 times forward earnings. Fact is, it doesn't look much better next to Starbucks (20 times forward earnings), McDonald's (17), Darden (11), or Brinker (12), either. And that's the good news.

The bad news is that if you eschew wishful thinking about what Chipotle might earn a year from now and focus on what the company actually is earning today, the stock looks even more expensive than it did at first glance. Priced on trailing free cash flow, Chipotle sells for a 42 times multiple. Priced on trailing earnings, it sports a 52 P/E. Needless to say, none of these numbers looks particularly attractive in a stock that Wall Street has pegged for 20% long-term growth. Also needless to say, if Chipotle somehow comes up short on that growth target -- even for so short a time as a single quarterly report -- the stock could get hit hard.

Foolish takeaway
Fools, I'm not saying Chipotle is a bad company. Far from it. I love the food. I love the prices. I love the fact that it carries Barq's root beer on tap. What I don't love about Chipotle is its overpriced stock. If you ask me, TheWall Street Journal was right on this one, and Bernstein is way off base in urging investors to buy Chipotle.

Maybe they should have read the paper first.

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At the time thisarticle was published Fool contributorRich Smithowns no shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 358 out of more than 180,000 members.The Motley Fool owns shares of Buffalo Wild Wings, Starbucks, Darden Restaurants, and Chipotle Mexican Grill.Motley Fool newsletter serviceshave recommended buying shares of Starbucks, McDonald's, Chipotle Mexican Grill, and Buffalo Wild Wings. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't 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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