Over the past three weeks, Wall Street’s major stock indexes have issued a stark reminder to investors that stocks don’t go up in a straight line. The iconic Dow Jones Industrial AverageBenchmark S&P 500and innovation-driven Nasdaq Composite are all down at least 5% from their respective record closing highs.
When volatility and uncertainty become apparent, both professional and everyday investors tend to seek the safety of proven outperformers. While “FAANG stocks” have been popular for more than a decade, it is stocks that cause splits that have investors – including Members of Congress – have really been arriving in droves in recent years.
Investors have gravitated toward stock split stocks
A “stock split” is an event that allows a publicly traded company to cosmetically change its stock price and number of shares outstanding by the same factor. I say “cosmetic” because stock splits have no impact on a company’s underlying market capitalization or operations.
A forward stock split is used by publicly traded companies to make their shares more nominally affordable to ordinary investors. This can be particularly useful for investors who do not have access to purchasing fractional shares. Meanwhile, a reverse stock split increases a company’s nominal share price to ensure continued listing on a major stock exchange.
However, there have been cases in the past where companies performed a reverse stock split to make their shareholders richer (e.g. Booking stocks), most investors focus on forward splits. Companies whose stock prices rise rapidly tend to innovate faster than their competitors. In other words, they’re exactly the kind of companies we expect to increase in value over time.
Since mid-2021, almost half a dozen well-known companies have completed a forward split, including Amazon, alphabet, Nvidiaand myself Walmartwhich took place earlier this year.
When an overperforming company announces that it will be joining this elite group of stock splits, investors generally flock to the stock. But that hasn’t been the case for one of the most active traders in Congress when it comes to a stock that’s soaring -split stock.
This history-making stock split is being sold by one of the most active traders in Congress
A fast-casual restaurant chain since its initial public offering (IPO) at $22 per share in January 2006 Chipotle Mexican Grill (NYSE:CMG) was a huge investment. Since shares ended the April 23 session at $2,915, that means Chipotle has delivered a total return of 13,150% since its IPO.
But there’s one thing Chipotle hasn’t done in its 18 years as a publicly traded company: perform a stock split. On March 19, the company’s board announced a 50-for-1 forward split. The magnitude of this split makes it one of the largest in the history of the New York Stock Exchange. Assuming shareholders vote for this split at the company’s annual meeting in June, Chipotle will begin trading at about $60 per share on June 26.
Despite that history-making stock split, House Rep. Michael McCaul (R-TX), the second-most active trader in Congress last year — McCaul completed 1,826 trades in 2023, according to data from Unusual Whales — was a seller of Chipotle shares.
Thanks to the STOCK Act, which went into effect in 2012, members of Congress, along with their spouses and children, are required to report deals valued at $1,000 or more no later than 45 days after they are made. Based on these regular transaction reports, we can see that after previous purchases of Chipotle shares in late July 2023 and early November 2023, McCaul has sold shares four times this year, ranging from $2,326 per share to $2,598 per share.
While it could well be a simple profit-taking move by a highly active trader on Capitol Hill, Wall Street’s latest stock split has its downsides, too.
To get straight to the point: Chipotle has clear competitive advantages, but is not attractively valued
Chipotle Mexican Grill has built its success on the belief that consumers will pay more for quality food. The company sources its vegetables locally whenever possible, uses responsibly raised meat that is free of routinely used antibiotics, and prepares its food fresh daily without the need for freezers. These additional steps have made it easier for the company to pass on higher prices to its customers.
Another reason for Chipotle’s success is its relatively small menu. By keeping the number of food offerings relatively small, it becomes easier for company employees to prepare food and keeps the line moving. Additionally, introducing new items can have a greater impact when the number of offers is limited.
Innovation has also played a role for Chipotle – and I’m not just talking about new foods. The introduction of dedicated mobile ordering lanes, known as “Chipotlanes,” has further sped up the ordering process and opened up a new revenue stream for the company.
Despite this trio of catalysts, two headwinds have the potential to slow hot Chipotle stock or perhaps send it lower.
The first concern is a stubbornly high inflation rate. Although Chipotle’s most loyal customers are willing to pay more for their groceries, rising costs in other sectors of the economy, such as housing, could begin to strain the wallets of the company’s casual customers. If selected predictive indicators and money-based metrics are correct, not even Chipotle would be immune from a U.S. recession.
The other problem for Chipotle is its aggressive valuation. While its clear competitive advantages merit a premium, the company’s shares are currently trading at 45 times expected annual earnings. There is only so much innovation that can be squeezed out of a restaurant chain that offers an organic growth rate of its existing outlets of around 8-10%. The company’s expensive shares, which appear to leave little room for upside in the coming quarters, could be the catalyst that tempts Rep. McCaul to seek an exit.
Should you invest $1,000 in Chipotle Mexican Grill now?
Before you buy Chipotle Mexican Grill stock, consider the following:
The Motley Fool Stock Advisor The analyst team has just identified what they think this is The 10 best stocks so investors can buy it now… and Chipotle Mexican Grill wasn’t one of them. The ten stocks that made the cut could deliver huge returns in the years to come.
Think about when Nvidia created this list on April 15, 2005… if you have $1,000 invested at the time of our recommendation, You would have $505,010!*
Stock Advisor provides investors with an easy-to-follow roadmap to success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks per month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
See the 10 stocks »
*Stock Advisor returns from April 22, 2024
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sean Williams has held positions at Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Booking Holdings, Chipotle Mexican Grill, Nvidia and Walmart. The Motley Fool has a disclosure policy.
A congressman goes against the grain and sells this skyrocketing stock split. The stock was originally published by The Motley Fool