Chipotle Mexican Grill, Inc. (NYSE:CMG) what is Pershing Square’s plan? by Mawunyo
Simply put, Activist investor Bill Ackman’s investment in Chipotle Mexican Grill (NYSE:CMG) is not about what the fast-casual chain does but, what investors will do. Chipotle already seems terrified by the activist investor and they are building a team of investment bankers and lawyers to help defend itself against Bill Ackman. In a bullish market where investors are fearfully keeping their fingers crossed, Bill Ackman’s hedge fund has also not bought large stakes in any stock in over 52weeks, but, that is until his recent investment in Chipotle Mexican Grill (NYSE:CMG). Chipotle is not the first restaurant stock Mr. Ackman is buying into. Ackman’s hedge fund Pershing Square owns a stake in Tim Horton’s and Burger King’s parent company, Restaurant Brands International (NYSE:QSR), which is the largest holding in his portfolio.
One thing is for sure, the billionaire investor is not in for short-term gains. The CEO of Pershing Square may disappoint Wall Street by not engaging in a proxy fight to get the company sold or spun-off. Chipotle is valued at $9.7billion. On September 7, 2016, Business Insider published an article titled “Wall Street Cannot ‘Fathom’ Why Bill Ackman Invested In Chipotle” in which they published top Wall Street analysts’ opinions of Ackman’s investment. Almost all the analysts including Stifel, Morgan Stanley, Oppenheimer and others criticized or downplayed Ackman’s recent buy.
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Chipotle Mexican Grill (NYSE:CMG) is still trying to regain consumer trust in order to recover its brand image thereby increasing sales. The burrito chain was faced with food safety crises. Sales declined over 24% in the recent quarter. Profits fell 82% and revenue fell to $998.4m from $1.2b. Bill Ackman bought a 9.9% equity in Chipotle.
A great business falling into a short-term tribulation is my definition of opportunity in the investing business. As an Investor Buying Behaviorist, I was quick to notice the psychological play in the activist investor’s recent stock pick. The father of Behavioral Finance, Richard Thaler, a behavioral economics professor at University of Chicago has a major investment strategy of looking-out for out-of-favor stocks. When investors are bored with a company’s management or its stock price movement, they brush aside certain market-driving news and they may pay an unperturbed attention to positive information from the company including; Insider Buying or Form 4 Filings.
The hedge fund manager has had a terrible year. His bet on Valeant (NYSE:VRX) landed him in court for the over-pricing of its drugs. Ackman in past years labeled Valeant as the next Berkshire Hathaway. His short, Herbalife (NYSE:HLF) finally reached an agreement with the FTC to pay $200m settlement. Ackman is not about to make another mistake after two consecutive mistakes, at least not this year.
So why will Bill Ackman target a fast-food chain?
Well, you know what they say, “the way to a man’s heart is through his stomach.” Billionaire investor Jorge Paulo Lemann, Chairman of private equity firm 3G Capital, knows this and has being buying up food and beverage companies including Anheuser-Busch InBev and Kraft-Heinz. The rise of food delivery tech startups was poised to get traditional fast-food chains out of business. However, the sharp decline in startup funding by venture capitalists is getting a number of online food delivery startups to shut down operations. Historical food safety crises including Jack-In-The-Box’s issues (which killed some young people) have proven that customers are likely to go back to frequenting their favorite restaurant even after food safety issues, but it will take a longer time for this to happen and also for sales to recover. However, it could be worth the wait for investors.
Mawunyo Adjei is an Investor Buying Behaviorist. He is a consultant to a number of investment managers and firms, pointing out their emotionally-driven financial decisions and teaching them to be ahead of the crowd of investors.