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……..

Is It Time To Short Burritos?….Almost  Google

Continuation from yesterday…….TIMING & MATHEMATICAL ANALYSIS:

As was suggested earlier in the book, both the overall stock market and individual stocks tend to move according to their own cyclical compositions. A number of cyclical examples were given, including a 5-year and a 17-18 year cycles. Showing that the stock market moves in clearly defined patterns.

While it is certainly possible to identify the internal mathematical structure of almost every financial instrument, a long trading history is a must.  In the case of individual stocks, a 15 to 20 year trading history is necessary. Anything less than that would not yield appropriate results.

Since Chipotle’s stock first started trading in January of 2006, it would have been impossible to ascertain the stock’s internal mathematical or timing composition by either 2008 or 2009. Even today.  Yet, despite our inability to figure out what the stock itself would do, we did have the next best thing available to us. The overall stock market.

As Chipotle’s stock price was collapsing in 2008, so was the market. In fact, between October 11th, 2007 and March 6th, 2009 the Dow declined close to 7,500 points or 55%. A massive mid cycle collapse reminiscent of the 1972-1974 and 1907-1908 declines. An analyst working with the overall cyclical composition of the market would be aware of the following facts at the time.

1. The overall market is tracing out a 17-18 year secular bear market that started in 2000.
2. The 2007-2009 bear market leg represents a mid cycle collapse where 50% or more declines are typical.
3. The bull market of October 10th, 2002 to October 11th, 2007 lasted exactly 5 years. Suggesting that the upcoming mid cycle decline would last 1.5-2 years.
4. Mid cycle bottoms are typically followed by either a 2-year or a 5-year bull market runs.

In other words, an analyst working with the mathematical and cyclical composition of the stock market would have had a very good understanding that the stock market was likely to hit a bottom in the early 2009, followed by a strong rally. This was further confirmed by a number of other indicators converging on March of 2009 as a high probability turning point.  Once again, the methods of analysis that have lead to such a conclusion can be studied further in my other book Timed Value.

When it comes to investing in Chipotle, this type of an analysis would have been of great help for a number of reasons. First, we would have realized that Chipotle’s share price is likely to stage a strong recovery if the market was to turn around and to stage a multi-year bull market rally. Since no fundamental reasons, outside of general overvaluation, existed for the company’s stock price to decline, it would have been logical to assume that Chipotle’s stock price would recover as soon as the market does. Second, the company was growing at a rapid pace despite the economic collapse and was now selling at a reasonable valuation. Finally, an analyst familiar with all of the above would be watching the company’s stock for a clear technical bottom and a confirmation. With a clear intention of purchasing the stock once the confirmation was obtained.

This confirmation was obtained during the 3rd week of November when the company’s stock broke out of its down trending channel at around $42.20. A long position should have been initiated at that time.

The result? 

Chipotle’ stock price had appreciated 1,465% (14.7 bagger) between its February of 2008 bottom and today.

To Be Continued Tomorrow…….

How You Could Have Been A Burrito Kingpin Google