Chipotle’s turnaround story sounds great with their 10% comparable-restaurant sales growth which beat analysts’ forecast for 8.3% growth.

Chipotle’s financials show they doubled the number of digital sales. The way these digital shelves work is that customers or drivers can enter a code and pickup their order. Chipotle’s restaurant workers can simply put an order in a digital shelve for customers and delivery drivers, eliminating the need for them to talk to an employee when picking up orders.

This also sounds great but it’s already baked into the stock. In fact, it’s far worse than that.

Chipotle will likely do a little over $5 billion in sales but the stock trades with a market cap of $21 billion. Market cap is the value of a company. To calculate it, you multiply the current stock price by all outstanding shares. A company that makes $5 billion a year in sales should not be valued at $21 billion. Chipotle would have to increase sales by over 400% to be fairly valued.

Entire sectors and many, many companies are overvalued like Chipotle. The stock trades at a P/E ratio of 24.25, and a Forward P/E ratio of 46.25. The company has an EPS of 7.

In the last year, the EPS has been growing by 42.5% which appears to be quite impressive. In fact, your parents generation would see that number and think that it means a company has products or services in strong demand. That logic would have been true 40 years ago when share buybacks were legal. Today, the growth in EPS for Chipotle is more a factor of its share buybacks than anything else.

Most stocks EPS growth has been artificially manipulated higher by way of share buybacks. Chipotle has engaged in heavy share buybacks too. The company has bought back hundreds of millions of dollars worth of stock over the years. These share buybacks reduce the shares outstanding and thus make a company’s EPS appear to be growing.

Chipotle’s EPS, without the manipulative impact of share buybacks, would be much, much worse that it is today.

With a positive Twiggs Money Flow and a rising large players volume, CMG technically looks like a good buy and hold play.

Going long an overvalued consumer discretionary restaurant stock while the Federal Reserve is about to cut rates for the first time in nearly a decade due to a slowing economy… WHAT COULD GO WRONG?

There’s no way that 10% comparable-restaurant sales growth justifies a stock trading at a value of more than 400% of its current sales IMO.