Continuation from yesterday…...GETTING IN AND OUT OF THE STOCK
As you very well know and as was suggested before, taking a trading/investment position in a Tenbagger at the appropriate time is only half the battle. Staying put, increasing your position and not being forced out to sell at the wrong time is the other side of the coin. After all, it wouldn’t be a good idea to take a 100% profit, only to see your stock go up another 20,000% over the next decade. As human beings we are wired to buy and sell at exactly the wrong time. Hence the inability to outperform the market. When it comes to Tenbaggers we must have a clearly defined set of trading rules that will help us mitigate the risk of being wrong (Please see the Tenbagger Trading Rules & Maximizing Returns chapter).
Yet, it is equally important to know when to get out and when to go short. In order to protect your profits and to profit from the stocks subsequent decline. In the case of Chipotle, today’s valuation levels and the overall macroeconomic setup present us with a unique opportunity to look at the other side of the coin.
Even though the stock price has appreciated close to 1,500% over the last 5 years and even though the company is performing incredibly well on the fundamental level, Chipotle’s stock is in a very dangerous territory. For a number of reasons.
First, the valuation itself. With a P/E of 62, a P/S ratio of 5.66 and a P/B ratio of 11.70, Chipotle’s stock price trades at levels typically reserved only for extremely fast growing and incredibly profitable tech companies. And while the company is executing very well, today’s price offers no room for a single misstep. In other words, even if the company continues to grow at 25-30% per annum, its stock price today offers very little further upside and way too much risk.
Second, the overall stock market is in a bubble territory as well. Just as it was at 2000 and 2007 tops. Suggesting that a significant correction is just around the corner. Typically, when such corrections develop we can anticipate overpriced stocks such as Chipotle to decline at X multiple to the overall market. For instance, when the Dow declined 55% between 2007 and 2009, Chipotle’s stock price declined 75%. Giving it a 1.4X multiple. Suggesting that if the Dow is to go through a 30% correction between 2014 and 2017, Chipotle’s stock could decline as much as 40-50%.
When we put two and two together, it would make perfect sense for investors in Chipotle to exit the stock at this time and to consider going short once the breakdown confirmation is received. In fact, looking at the chart alone, if the overall stock market is to correct over the next few years as some of my other forecasts suggest, it is highly probable that Chipotle’s stock price will retest its 2012 low of $243. That would mean a 64% collapse in its stock price and within a relatively short period of time.
This presents investors in Chipotle with a unique opportunity to A. Sell at the top B. Profit on a short side of the trade and C. To enter Chipotle’s long side at a much better valuation level at a later point to benefit from the subsequent bounce. Once again, this concept will be further reviewed in our Tenbagger Trading Rules & Maximizing Returns chapter.
To Be Continued Tomorrow……..
