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The news on Chipotle Mexican Grill (CMG) seems to get worse every day. Yesterday, the company announced that sales are down 30% nationwide, and that it has been subpoenaed as part of an investigation into a norovirus outbreak at one of its California locations. Chipotle has been dogged by a string of health-related incidents since October of last year.
Ten years ago this month, Chipotle, then a subsidiary of MacDonald's (MCD), went public. In those 10 years, the stock has never been as deeply oversold (green) as it is now, according to Chipotle's relative strength index (RSI). The two oversold signals that occurred in 2014 (A, B) provided opportunities to buy the stock below $500 (arrows). One year later, the stock traded at $750.
In addition, Chipotle has just filled a large gap from October of 2013 (circled).
However, despite the oversold reading, there is no way I'd consider taking on a full position in Chipotle right now. This stock has been a falling knife, and this week's bout of market volatility cannot be ignored. It's a questionable time to open any long position, much less one in a stock that is being sold with such vigor.
On the other hand, Chipotle is already down 43% from its all-time closing high of $757, set in August of last year. While the news on the stock could get worse, it's possible that the bad news is already out.
Here's the game plan: I'll buy one-half of a normal-sized position in Chipotle if the stock falls to its next support level, which lies at $350. I'll add the other half at a major support level from 2012, which stands near $240. Hopefully, that second entry will never occur.
Things may seem bleak for Chipotle right now, but it is not the first company to experience a public relations disaster. In January of 2012, the Costa Concordia, a cruise ship operated by a subsidiary of Carnival Corp. (CCL), wrecked off the coast of Italy, resulting in the loss of 33 lives. In response, shares of Carnival plunged below $30.
In late 2013, a data breach at Target (TGT) put the personal information of over 70 million clients at risk. It was a public relations nightmare. Within a month, shares of the retail giant had fallen to $55.
Yesterday, Carnival closed at $53.54, and Target closed above $74. Investors who bought these stocks on bad news were handsomely rewarded. That doesn't necessarily mean that it's time to go all in on Chipotle, but it might be time to consider taking at least a small bite.