The markets may be at record highs, but there is actually a huge profit opportunity from one of the worst stocks on the market right now.
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When you are looking for the worst stocks on the market, companies with price-sensitive customers, recent scandals, or any industry disruptions are all great places to look.
The stock that we’re bringing investors today is also part of a challenging industry: the food-service industry
The restaurant industry is highly competitive with low profit margins. Because of this, any restaurant stocks trading at a high multiple of earnings should be a red flag. One of the worst stocks now is trading at 150 times earnings, which positions it for a hard fall.
While fast-casual revenue growth grew more than 10% from 2014 to 2015 and the restaurant industry as a whole grew 5%, this company has seen sales fall by almost 20% this year.
Another nail in the coffin for one of the worst stocks now is that customers are price sensitive. That means fast-food and fast-causal companies cannot raise prices to help compensate for rising costs and shrinking margins.
In a highly competitive environment such as the fast-food industry, bad press only exacerbates these problems. And the stock we’re targeting today has been facing intense media scrutiny for over a year.
Due in part to this bad press, this stock has fallen 23% year to date (YTD) and almost 9% this week alone. Money Morning Global Credit Strategist Michael Lewitt believes “the stock is headed much lower and is a prime candidate for you to profit from.”
Here’s one of the worst stocks on the market today and how we plan to profit from it…
How to Profit from One of the Worst Stocks on the Market
After news broke in late 2015 of customers getting sick, Chipotle Mexican Grill Inc. (NYSE: CMG) started a downhill trip. The food-borne illness news has been hard to recover from, making CMG one of the worst stocks on the market and one of the best stocks to short.
Lewitt has been warning investors about Chipotle since August 2015. Since then, CMG stock has fallen more than 50%.
“I had my eye on Chipotle Mexican Grill Inc. for a while – even before this fast-food darling suffered an E. coli and norovirus outbreak in the fourth quarter of 2015,” Lewitt said on Dec. 7.
Chipotle sales have dropped drastically after the food-borne illness news. Third-quarter sales are down 14% over 2015 third-quarter sales. Overall, sales are down more than 18% for the first nine months of 2016, compared to the same period in 2015.
Sales are not the only thing making Chipotle one of the worst stocks on the market…
Earnings per share (EPS) are down over 90%. EPS through Q3 2016 was only $0.23, compared to $12.92 per share over the same time period in 2015.
Because of that earnings collapse, Lewitt says “the stock is headed much lower and is a prime candidate for you to profit from.”
With transactions down over 15% in the third quarter over 2015, and down almost 18% YTD from 2015, it will be difficult to turn around earnings for 2017. This makes Chipotle one of the best stocks to short. Another strike against one of the worst stocks is that Mexican food makes up only 7% of all sales in the fast-food industry, so it is going to be hard to increase the amount of transactions, according to the Franchise Help Fast Food Industry Analysis 2016.
If poor sales and dismal earnings weren’t bad enough, Chipotle is currently trying to fend off activist investor Bill Ackman. His Pershing Square Capital Management bought an almost 10% stake in Chipotle a few months ago, and his recent track record is not promising. Ackman’s hedge fund has lost 20% this year.
“At the end of the day, Chipotle is extremely overvalued,” Lewitt said. “It faces a very difficult battle to gain back customers who don’t want to end up in the hospital after going out for a meal.”
The Bottom Line: Overall, 2016 has been a good year for the stock market, but not every stock is outperforming. Chipotle is the perfect example. However, by taking a short position on Chipotle, you can profit from its woes.
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