Sometimes, a company will be caught in a virtuous loop, where its rising share price attracts analyst upgrades. In turn, the shares rise again, prompting more analysts to turn bullish. While that can sometimes end up looking a little silly in hindsight, for the right company, it may be a sign that growth is taking off.
That could be the case with a big growth story in the markets right now, especially when the virtuous cycle leads a company back to all-time highs after a big selloff.
In this case, analysts who love Chipotle Mexican Grill (CMG) may be on to something. The company has received a number of upgrades in recent weeks, and shares have been taking off. Yet they’re still under 52-week highs, and shares have only beaten the S&P 500 by 5 points in the past year.
With revenue up 23 percent and consumers coming back in droves, the company looks likely to increase sales and potentially profit margins from current levels. And despite relatively flat stock performance in the past year, shares have gone from nearly 110 times forward earnings to around 60.
Action to take: Investors may like shares here, or at least after a brief pullback as the recent rally has made shares overbought on a technical basis in the short term.
For traders, a few down days could lead to a solid entry price on a call option trade, like the September $1,800 calls. Last going for about $10, they’re not likely to move in-the-money, but could rally another 25-50 percent if the current uptrend continues.
Disclosure: The author of this article has no position in the company mentioned here, but may make a trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.