How I got scared out of a great turnaround stock
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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