This business checks the qualitative screen but is lacking in one important area.
Warren Buffett is regarded as the greatest capital allocator ever. His track record running Berkshire Hathawayhas made him a legend. But he missed out on a massive winner.
It might not be a business operating at the cutting edge of artificial intelligence (AI), but Chipotle Mexican Grill (CMG 0.72%) has been a fantastic investment. In the past five years, its shares have skyrocketed 315%, a gain that crushes the Nasdaq Composite.
The Oracle of Omaha may or may not have ever had has his eye on this booming company. But here are three reasons he might love this top restaurant stock, and one obvious reason he might avoid it like the plague.
Building a strong brand
Look through Berkshire's holdings, and you'll notice companies with powerful brands. Apple, American Express, and Coca-Cola are top Buffett positions.
Chipotle might not be on quite the same level as those industry leaders, but one can't deny that the brand is well-known in the cutthroat restaurant sector. This business singlehandedly pioneered the fast-casual food category -- so much so that other restaurant concepts with different cuisines exist all over the country that are trying to emulate what Chipotle has accomplished. The company has roughly 3,500 stores, which adds to its wide reach and brand exposure.
According to Piper Sandler's Spring 2024 "Taking Stock With Teens" survey, Chipotle is the third-most-popular food brand among teenagers. That's up from No. 4 in the fall of 2023.
Putting the customer first
Businesses that prioritize their customers perform exceedingly well. Amazon, a small Berkshire holding, embodies this philosophy. I think Chipotle is a company that does this, too.
Over the past several years, the company has been focused on bolstering its digital and technological capabilities. Chipotle has a thriving rewards program that facilitates digital ordering. Online orders represented 36% of overall sales in Q4.
Moreover, the business is aggressively building new stores with Chipotlanes, which are drive-through locations. This increases accessibility and convenience for hungry customers -- a move that improves the user experience and reduces the friction to order more food. In other words, it's just easier.
Proven pricing power
Warren Buffett is known for having some fantastic observations over the years. One sticks out in particular in this situation. He once said:
The single-most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business.
This hasn't been more on display than in the past couple of years. With inflationary pressures negatively impacting the restaurant industry, Chipotle successfully raised its menu prices multiple times to offset higher input costs. However, revenue continues to rise at a double-digit clip, along with strong foot traffic. This is another trait that Buffett appreciates.
One reason to avoid: Excessive valuation
Despite the compelling reasons Chipotle is a great business that would pass the qualitative screen for Berkshire, investors can't ignore one variable that makes the stock one to avoid like the plague. I'm talking about the valuation.
The stock's remarkable performance, which has continued this year with a 29% gain through mid-April, represents investors' heightened optimism for this company. Of course, it helps that Chipotle keeps reporting quarterly financial results that beat estimates.
But shares are extremely expensive today. You can buy them at a price-to-earnings ratio of about 67, which is in nosebleed territory. It prices in so much bullishness about Chipotle's prospects. Even if you believe management can hit its target of 7,000 stores in North America over the long term, which I think it can, there's still zero margin of safety.
Warren Buffett will never overpay for a stock. While Chipotle might deserve a spot on his watch list, I don't see him buying the business anytime soon -- and you may not want to, either.
American Express is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Berkshire Hathaway, and Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
FAQs
Why? As books and documentaries exposing the negative sides of the fast food industry became popular, Chipotle's sales and profits grew. Consumers who wanted healthy food weren't ordering salads at McDonald's and Wendy's (WEN), looking instead for naturally-raised or organically-produced food.
Why is Chipotle stock so successful? ›
Why? As books and documentaries exposing the negative sides of the fast food industry became popular, Chipotle's sales and profits grew. Consumers who wanted healthy food weren't ordering salads at McDonald's and Wendy's (WEN), looking instead for naturally-raised or organically-produced food.
Does Warren Buffett invest in Chipotle? ›
Chipotle Mexican Grill
Through Berkshire Hathaway, Warren Buffett owns dozens of stocks across various industries. But there's one thriving business in a sector he's familiar with that the conglomerate doesn't have a stake in. That company is Chipotle Mexican Grill (CMG -7.50%).
What three stocks does Warren Buffett own? ›
Top 10 holdings in the Warren Buffett portfolio
- Apple Inc. (AAPL).
- American Express Co. (AXP).
- Bank of America Corp. (BAC).
- Coca-Cola Co. (KO).
- Chevron Corp. (CVX).
- Occidental Petroleum Corp. (OXY).
- Moody's Corp. (MCO).
- Kraft Heinz Co. (KHC).
Shares in fast casual restaurant Chipotle Mexican Grill (CMG) jumped more than 4% in extended trading Wednesday after the burrito maker served up second quarter results above Wall Street's expectations, as demand for the chain's menu items allowed it to avoid lowering prices, helping to sustain revenue growth.
Is Chipotle a good stock to buy now? ›
Chipotle has 23.92% upside potential, based on the analysts' average price target. Is CMG a Buy, Sell or Hold? Chipotle has a consensus rating of Moderate Buy which is based on 16 buy ratings, 10 hold ratings and 0 sell ratings.
What are the risks of investing in Chipotle? ›
Chipotle shareholders face a major risk
Because the stock has performed so well in recent years, it has become extremely expensive. Shares trade at a price-to-earnings (P/E) ratio of 50 right now, even after the latest 26% dip in the stock.
Why doesn't Warren Buffett like stock splits? ›
Buffett believes that splitting the stock would go against his strategy and that the high price tag attracts like-minded investors seeking long-term gains in intrinsic value.
What food chain does Warren Buffett own? ›
It's in Buffett's circle of competence as well, given that his conglomerate previously owned Restaurant Brands International and currently owns Dairy Queen.
What does Warren Buffett invest with? ›
Warren Buffett's stock purchases in the most recent quarter include Chubb Limited (CB) and Occidental Petroleum (OXY). HP Inc. (HPQ) and Paramount Global (PARA) are among Warren Buffett's stock sales in the most recent quarter. The Berkshire Hathaway portfolio includes 41 stocks as of May 2024, including Apple Inc.
Warren Buffett does not invest in gold. He has invested almost $1 billion in silver, so the reason for his aversion is not simply a dislike for precious metals. The explanation for Buffett's dislike of gold and for his enthusiasm about silver stems from his basic value investing principles.
Does Warren Buffett own Amazon stock? ›
Buffett is betting big on Amazon
Berkshire has owned Amazon stock since the first quarter of 2019. Since then, the share price has more than doubled. Berkshire's original stake was valued at around $860 million.
What did Chipotle get in trouble for? ›
LOS ANGELES – Chipotle Mexican Grill, Inc. has agreed to pay a $25 million criminal fine and institute a comprehensive food safety program to resolve criminal charges that it adulterated food that sickened more than 1,100 people across the United States from 2015 to 2018.
Who owns Chipotle stock? ›
Largest shareholders include American Century Companies Inc, Jennison Associates Llc, IMC-Chicago, LLC, IMC-Chicago, LLC, Bank of New York Mellon Corp, William Blair Investment Management, Llc, Swiss National Bank, Envestnet Asset Management Inc, Simplex Trading, Llc, and Simplex Trading, Llc .
Why is Chipotle a growth stock? ›
Consistent restaurant openings
Chipotle is opening new restaurants at a much faster pace than many of its peers as well. Its number of year-end stores rose from 2,491 in 2018 to 3,437 in 2023, and the company plans to open 285 to 315 new locations this year.
How is Chipotle so profitable? ›
Chipotle's Revenues & Financials
Few restaurants have achieved such high growth rates due to Chipotle's market share demand, strong brand equity, and ability to generate repeat sales.
Why is Chipotle growing so fast? ›
Chipotle Mexican Grill (NYSE: CMG) has been a huge success for investors. That's largely because the brand concept has been a huge success with consumers. The latest sign of that is the company's massive 11.1% same-store sales performance in the second quarter of 2024. That helped to drive overall revenue 18.2% higher.
Why does Chipotle have a high turnover rate? ›
Chipotle workers describe a corporate culture that drives high employee turnover, including violations of worker protection laws, understaffing, inconsistent training, and sexual harassment.
Why is Chipotle so hyped? ›
Part of what makes Chipotle so popular among such a broad range of people is its versatility and ease of customization. Every customer has their own order or preference of what they want in their order. For anyone who wants a relatively healthy meal that will fill you up, with no doubt, Chipotle is the way to go.
