Chipotle’s Downgrade Was Lame

BMO Capital Markets is a leading, full-service North American-based financial services provider offering equity and debt underwriting, corporate lending and project financing, merger and acquisitions advisory services, securitization, treasury management, market risk management, debt and equity research and institutional sales and trading.

BMO Capital Markets issued a warning about the company’s exposure to the rising price of pork caused by African swine fever.

“It has the greatest pork exposure in our coverage (estimated at 10 percent), and our work suggests that CMG realizes commodity inflation with little to no lag. This suggests that CMG could be among the earliest to realize the impacts of African swine fever, potentially as early as the third quarter of 2019,” wrote analyst Andrew Strelzik, of BMO Capital Markets, which also downgraded Chipotle from “market perform” to “underperform,” and lowered its 12-month target price from $675 to $620.

“BMO Capital Markets’ analysis is not accurate. The cost of our pork represents less than 2 percent of Chipotle’s total food costs. Since we purchase higher quality, more expensive pork than commodity pork, and we have pricing agreements in place, we don’t expect a significant impact on our costs,” wrote Stefani Green, manager of Chipotle external communications, in an emailed statement.

Source

Increased pork prices, what a lame excuse to downgrade Chipotle on, but nevertheless clever.  You see BMO Capital Markets does research for institutions and high net worth individuals, meaning these are their clients.  In order to keep these clients as customers, BMO Capital Markets must make them money.  The alleged scenario that played out was BMO Capital saw a double top forming, a reversal pattern, they told their clients to short Chipotle before announcing the downgrade. 

So when price returned to the $700 level after a wonderful 18 months for the stock price and BMO Capital Markets capitalized on the price momentum fizzing out. Oh and I like their target, as it sits just right above the weekly demand at $604. 

This post is my personal opinion. I’m not a financial advisor, this isn’t financial advise. Do your own research before making investment decisions.