Yahoo Finance Is Chipotle Mexican Grill Inc (NYSE:CMG) the Best Restaurant Stock to Buy According to Billionaire Ackman?
We recently published a list entitled Billionaire Bill Ackman's 2024 Portfolio: 6 Best Stocks to Buy in 2024. Since Chipotle Mexican Grill Inc (NYSE:CMG) ranks 1st in the list, it deserves a deeper look.
Billionaire Bill Ackman recently made headlines after reports suggested he plans to take his investment firm public as soon as next year. A Wall Street Journal report said the 58-year-old billionaire was selling a stake in Pershing Square to investors as part of a funding round that could value the firm at about $10.5 billion. According to data from WSJ, Pershing Square managed over $16 billion in assets as of the end of April. The publication said Ackman has told investors that he plans to at least quadruple assets under management.
Ackman has run a concentrated portfolio for years. As of the end of the March quarter this year, his portfolio was worth over $10 billion, with just seven stocks. And yet Ackman made $610 million last year, coming in at the seventh position in Bloomberg’s annual list of the best-paid hedge fund founders.
In 2022, Ackman, who writes long and fiery posts on Twitter, announced that he was done with activist investing and was taking a “quieter approach.” In 2023, Pershing Square Holdings generated strong NAV performance of 26.7% versus 26.3% for its principal benchmark, the S&P 500 index.
Ackman talked in detail about the fund’s returns and future strategy during his 2023 letter to investors:
“While our investments in hedging and asymmetric instruments have been enormously profitable, we could have done better. In each of the three black swan events of the last 20 years, we had an early and highly variant view of the likely impact and probability of their occurrence and had identified and invested in instruments that offered profits many times their cost. In retrospect, we should have invested more and achieved even greater profits without risking materially more capital.”
For this article we scanned Ackman’s Q1 portfolio and picked his top six stock holdings. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Chipotle Mexican Grill Inc (NYSE:CMG)
Billionaire Bill Ackman’s Q1’2024 Stake Value: $2,162,590,372
Billionaire Bill Ackman’s hedge fund decreased its position in Chipotle Mexican Grill Inc (NYSE:CMG) in the first quarter by 10%, ending the period with a $2.16 billion stake in the company. The restaurant chain is still the biggest holding of Pershing Square. In April, Chipotle Mexican Grill Inc (NYSE:CMG) posted strong Q1 results, which showed revenue in the period jumped by 13.9% on a YoY basis, beating estimates by $30 million. Comparable sales in the quarter increased by 7%. For the full year, Chipotle Mexican Grill Inc (NYSE:CMG) expects its comp sales to grow in the mid to high-single digit range. Chipotle Mexican Grill Inc (NYSE:CMG) has been steadily increasing its footprint over the past several years. Back in 2007, the company had just 704 stores. This figure now stands at 3437. One of the biggest signs of Chipotle Mexican Grill Inc’s (NYSE:CMG) strengths is its rising margins, even when the restaurant industry is reeling from high labor costs and squeezing margins. Chipotle Mexican Grill Inc’s (NYSE:CMG) current net margin of 12.45% is the highest it has been in the past decade.
Chipotle Mexican Grill Inc (NYSE:CMG) trades at 47X 2025 EPS estimate of $66.92 set by Wall Street analysts. This P/E is much higher than the industry of 16. Chipotle Mexican Grill Inc (NYSE:CMG) is expected to see revenue growth of just 13-15% per year over the next 3 years, while its EPS growth is expected to come in between 3% to 20%. Analysts expect the American consumer to remain prudent in spending amid higher for longer interest rate scenario and dwindling savings. Therefore, for investors looking for high-growth stock appreciation names, Chipotle Mexican Grill Inc (NYSE:CMG) might not be the ideal choice.
Average analyst estimate for Chipotle Mexican Grill Inc (NYSE:CMG) is $3244.77, which presents just 3% upside potential from the current levels. That means the Wall Street believes the stock has reached its potential and based on current catalysts and growth trajectory it does not have any room to grow significantly.
Rowan Street Capital stated the following regarding Chipotle Mexican Grill, Inc. (NYSE:CMG) in its first quarter 2024 investor letter:
“The best investment ideas are simple. We have previously written about Chipotle Mexican Grill, Inc. (NYSE:CMG). It turned out that this was our best investment idea since starting the fund. The stock is up 10x since we first invested at the end of 2017 (~47% annualized). Sounds absolutely incredible, except that your managers sold CMG back in 2018 (thinking that the stock had gotten ahead of itself), and proudly booked an 85% profit in 6 months, patting ourselves in the back. Interestingly, when we wrote about this in our 2019 letter, describing our big mistake to sell, the stock still went up +270% since that letter, delivering an impressive 30% annual return. This is an incredibly important point! You do not get many Chipotles in your investing career. Companies like these are super rare and the opportunity to buy them at an attractive price (which we got in 2017) is even rarer. Booking a quick profit, paying the capital gains tax and thinking that you will find another CMG to invest your proceeds into is usually delusional.
Along with our personal investment case of CMG, let us compare that to the experience that Bill Ackman had with the same investment. He is a famous hedge fund manager that we greatly admire, who has achieved an incredible track record in the past 20 years running Pershing Square. Bill Ackman has owned the restaurant stock since the third quarter of 2016 at an initial cost basis of about $411 per share (our cost basis was $289). Originally, Mr. Ackman bought 2.88 million shares. He was wise to hold on to CMG stock and it still is the top position in his fund (18% weight). But, if you follow his 13F filings, which are the public filings disclosing large investment manager’s holdings of publicly traded securities, he kept trimming his position as the stock went up. We calculated that if he just sat on his original 2.88 million shares and didn’t sell a share, his position would be worth $8.8 billion today. This would represent ~50% of his entire firms’ assets under management (AUM). But he only has $1.8 billion invested in CMG as of Q1 2024. As Charlie Munger said: ““The first rule of compounding is to never interrupt it unnecessarily.”…” (Click here to read the full text)
Overall, Chipotle Mexican Grill Inc (NYSE:CMG) ranks 1st on Insider Monkey’s list of Billionaire Bill Ackman's 2024 Portfolio: 6 Best Stocks to Buy in 2024. You can visit Billionaire Bill Ackman's 2024 Portfolio: 6 Best Stocks to Buy in 2024 to see other stocks in the list. While we acknowledge the potential of Chipotle Mexican Grill Inc (NYSE:CMG), our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than Chipotle Mexican Grill Inc (NYSE:CMG) but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Michael Burry Is Selling These Stocks and Jim Cramer is Recommending These Stocks.
Disclosure: None. This article is originally published at Insider Monkey.
