Shares of Chipotle Mexican Grill (CMG) fell roughly 9% Wednesday, after the company posted a sharp quarterly earnings miss after the closing bell Tuesday, prompting investors to ask whether restaurant stocks are where they should be putting their money.
Chipotle's third-quarter earnings per share of $0.27 were largely pulled down by a slump in same-store sales, which fell 21.9% year over year vs. analyst forecasts for a 18.7% decline, reflecting the pressure facing the broader restaurant industry.
"Number one: this is a very hair-trigger market. It's almost like shoot first; ask questions later," Real Money contributor and Growth Seeker co-portfolio manager Chris Versace said of the selloff in a Wednesday phone interview. He added that Chipotle's underlying problems are based on substantial deflation in the global food market, prompting more consumers to instead opt to eat in and take advantage of cheap prices at the supermarket.
"Restaurant traffic is really being hurt and there's been a severe drop in consumers going to restaurants because of cheaper alternatives," he noted, suggesting investors might be better off buying into food distributors such as Providence, R.I.-based United National Foods (UNFI) , a Growth Seeker holding.
As for valuation, Chipotle risks being overpriced on a price-to-earnings (P/E) basis, with the shares trading at roughly 40x expected earnings per share for next year, Real Money contributor Jon Heller said in a Wednesday phone interview.
"That's a pretty rich multiple and when your same-store sales drop like they did they may have a problem," he added, noting that much of the share price is based on expectations of substantial new-store openings.