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Chipotle Mexican Grill 10-year chart

How I got scared out of a great turnaround stock

Darcy Paterson

Apr 26, 2022  
Advice, Education, Turnarounds

Anyone who has lived in the western world in the last 20 years has heard of Chipotle Mexican Grill. The restaurant chain with 3000 locations had a 2021 net income of $652 million. However, it hasn’t always been this successful.

Around 2015, it had a series of food poisoning incidents that destroyed its reputation. Over the next 2 years, the stock price cratered from $750 to about $270. People stopped eating at its restaurants. Between 2015 and 2016 its net income went from $475 million to $22 million.

Not only did the company destroy its reputation it had a hard time turning itself around. This is when I started to question its potential and sold my recently purchased shares.

The real key to making money in stocks is not to get scared out of them.

Peter Lynch

I had been following the story of Chipotle because I am a big believer in Turnaround stocks. Buying good companies when they hit a rough patch provides great returns. When they’re out of favour shares are cheap. Years later after the turnaround has occurred share prices get bid up higher. Easy money.

I bought shares of Chipotle for $407 in March 2017. I sold them for $376 in July 2017. In March the company’s turnaround was taking shape. Then in July it had another food poisoning incident. The turnaround looked shaky.

The company hired a new CEO Brian Nicol a few months later. That CEO did a good job of getting the company back on track. No more food poisoning incidents. The share price is now roughly $1400. Had I not got scared and sold I would have made over 300% in about 5 years.

In retrospect I should have checked in on the turnaround again after the new CEO was hired. I still believe selling my shares was the right thing to do. As Lynch would say if the fundamentals of a company have changed then it’s time to reevaluate.

Anyways, turnaround stocks can make great investments. I made about a 600% return with Activision buying it when it was out of favour.

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