Should You Buy Chipotle Shares?

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Investors have been extremely bullish on Chipotle Mexican Grill (NYSE:CMG). The company has been one of the fastest-growing restaurant chains in the country. This has been reflected in the company’s annual earnings, which have skyrocketed from less than $2 per share in 2006 to more than $10 per share today. This success story also has anecdotal backing — we hear stories of how Chipotle stores see long lines of people trying to get a large, gourmet meal for under $10.

As a result, investors have bid up Chipotle shares more than 1,200 percent in the past 10 years, and the uptrend appears to be intact. Furthermore, the shares continue to outperform despite the fact that the stock market has been neutral this year. And despite the fact that some of the higher-momentum stocks have started to reverse course, Chipotle shares have risen nearly 7 percent year to date.

But while investors anticipate continued outperformance from Chipotle, I think there are some risks.

The first is valuation. Growth stocks are a rarity in this market, and so investors have irrationally bid up the shares of the few growth companies that they can find. Chipotle’s shares trade at a whopping 44-times 2014 earnings estimates. While the company has been growing its earnings at about 27 percent annually since 2006, this growth doesn’t justify a 44-times earnings multiple.

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