Chipotle: Bumpy Ride Amid Investor Biases

Picture Courtesy: Saul Loeb/AFP/Getty Images

In terms of forward EV/EBITDA ratio, Chipotle Mexican Grill, Inc. (NYSE:CMG) trades nearly at a 62.1 percent premium to McDonald’s Corporation (NYSE:MCD) and The Wendy’s Company (NASDAQ:WEN), its rivals in the fast food industry. CMG’s stock price has endured a choppy ride since its food safety issues in late 2015. Cognitive biases, arising from information processing and memory errors of the human brain, throw light on some of the reasons behind CMG’s tumultuous stock price movement.

Several such biases as regards to CMG are notable. The sharp and transient stock price movements upon media reports on food safety issues at CMG reflect how investors are susceptible to availability bias. Inadequate adjustment of earnings forecasts despite the company’s efforts to improve food safety highlights the conservatism bias. Confirmation bias, as indicated by the recent surge in CMG’s share price, impacts the decisions when investors only focus on information that supports their views. Higher volatility of the stock due to availability bias and the recent increase in stock price amid confirmation bias suggests overvaluation of CMG. However, cognitive biases can be easily corrected through better awareness, and therefore, understanding the impact of biases on investment decisions lead to better portfolio management.

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Disclosure: I/We have no investments in the stocks mentioned in the above article and don’t intend to open any within the next 72 hours. I wrote this article for myself, and it expresses my opinion. I/We receive no compensation, nor do I/We have any business relationship with any companies whose stocks are mentioned in the article.

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