Chipotle Mexican Bad Spices Creating Financial Indigestion $CMG $MCD

The exterior of Chipotle Sand Lake Road locati...

The exterior of Chipotle Sand Lake Road location (in Orlando, Florida) (Photo credit: Wikipedia)

Chipotle Mexican (NYSE:CMG) which was spun out of McDonald’s (NYSE:MCD) some six years ago is creating some serious financial indigestion. The class action lawsuits are piling up. The finger is being pointed at officers and directors for misleading shareholders about the true state of financial affairs. Sour grapes and blood sucking litigation lawyers you say. Well lets take a look at what some will say is probable cause.

The stock traded around $450 around March/April. now its down to a very dull $295. OK so whose fault is that. How come investors were so like stupid.

So here’s a few facts to chew on.

CFO Jack Hartung sold 10,000 shares on that April high.

Total insider sales that took place over the class-action period (February 1, 2012 to July 19, 2012):

1.)    Montgomery Moran, Co-CEO, sold 160,000 shares worth$63.7 million

2.)    Steve Ells, Chairman & Co-CEO, sold 150,000 shares worth $58.5 million

3.)    Jack Hartung, CFO, sold 67,300 shares worth $27.7 million

4.)    Robert Blessing Jr., sold 20,000 shares worth $7.7 million

5.)    Mark Crumpacker, Chief Marketing Officer, sold 15,297 shares worth $5.8 million

6.)    Albert Baldocchi, Director, sold 10,000 shares worth $3.7 million

The directors and officers emptied 422,597 shares on to the open market between February 6 and April 13 with the stock climbing nearly 20 percent between those dates (from $371.63 to $440.40). Incidentally the last day of these insider sales, April 13, marks the highest price of the Chipotle’s stock since that date and only two dollars short of Chipotle’s 52-week high.

So like the insiders were not shy when it came time to run for the hills. You can excuse the class action types for smelling blood in the water.

I’m not a lawyer and I cannot comment on the tactics of this type of litigation. But management and directors will be very distracted and will take their eye off the ball. Chipotle growth is decelerating. Profits margins are under pressure. The business is getting tought to run.

In the meantime investors are looking at the 36 trailing PE and having a genuine WTF moment. No dividend has been issued while we are looking a things. The short position is about 10% of the float which would normally be bullish but not at a trailing 36 PE ratio. Money flow is about even steven so no valid signal there.

So no fundamentals screaming at you with a buy signal. Nasty legal trouble in the executive suite so be skeptical, very skeptical about this one.

George Gutowski writes from a caveat emptor perspective. Follow him on twitter@financialskepti