Thursday, November 16th, 2017

How to buy stocks cheap: CMG

Chipotle Mexican Grill founded in 1993 is a leading restaurant group stock that has been on rise in the last 2 years. , its involved in development and operation of fresh food Mexican restaurants, tacos, burritos and salad bowls. The company operates nearly 1000 restaurants in US and Canada.

This leading stock gave a stellar quarter on 2/10/11. The stock went up 16 and settled at 269 to close. The stock has been consolidating on a base since early December 2010 and broke out of this pattern in February. The earnings blew the doors off on Friday and in heavy volume of 7.5 million shares traded the stock rode 12 points higher forming an outside day , a large white candle.

CMG’s 3 years earnings per share growth has been 41% and 3 years sales growth just about 18%. Sales changes since last quarter 24% and has a P/E ratio of 48 and a market cap of 8.32 Billion with a 13.4 % profit margins. The stock has traded between 102.88 at the lowest and 274.85 in the last 12 months. In other words it almost tripled in price in last 52 weeks of trading.

If I wanted to own such a stock whats the first thing I would do? I can always buy the stock at open at 270 and be done with that. Since I am little more savvy buyer and often like to own stock much cheaper and at steep discounts that wont fit my outlook. I also like to drive some income when I am owning a stock and that helps me a bit here and there as well. Not bad ?

Looking at the charts of CMG I see its 50 day moving average rising slightly since the stock has been flat for last 2 months consolidating in the base and its 21 day moving average rising sharply though.There has been a huge accumulation day on 2/10/11 and its most likely that the momentum is still in tact and may continue here and the stock may go much higher than 270.

So we will use a simple strategy which the same as selling covered calls on any stock. Here is the option trade

Trades: Sell 3 March 240 puts for 3.00 or better with stock around 270.

A stop loss can be placed at 250 just to avoid any assignment.  The stock has to drop 30 points which more than 10% to cause us any inconvenience in next 30 days

We may or may not be able to buy the stock here unless CMG drops another 30 points lower and goes below our short strike of 240, but we would be nicely rewarded for our efforts for trying for about 3.30 in premiums into our account.

Those of you who are afraid of selling naked puts or if you are not allowed to trade naked puts you can always buy a lower strike put of say 210 or 200 and lower your margins and meet brokerage requirements, but your profits would be lower.

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!