As I touched on yesterday, Chipotle Mexican Grill (NYSE:CMG) is among the restaurant stocks that’s seeing a lot of attention right now. While CMG stock did dip yesterday on the news that its board has approved a 50-for-1 stock split to take place on June 6 (which will require a shareholder vote that day), shares are moving higher today. At the time of writing, shareholders in Chipotle are up nearly a full percent, making up a chunk of yesterday’s dip.
Moving forward, the question is whether Chipotle can go on a nice run heading into this vote. Typically, share splits are bullish for companies with very high stock prices. That’s because investors who may otherwise be priced out of these stocks (due to some brokerages and trading platforms requiring the purchase of full shares) can step in. Higher retail interest means a broader investor base, and that’s generally good for shareholders over time.
There are some other factors to consider when it comes to stock splits that may benefit investors, should the vote pass. Let’s dive into what this split means and whether a rally in the coming weeks is in order.
CMG Stock Moves Higher Ahead of Key Shareholder Vote
Stock splits don’t change anything from a mathematical perspective regarding how a company is valued. The market capitalization won’t change, just the number of shares available. If this vote passes (which it’s most likely to), shareholders of record as of June 26 will receive 50 shares for each full share they currently hold. It’s just taking a pie and cutting it into smaller slices.
That said, as mentioned, retail investors tend to like such moves, as they can buy more shares for the same amount of money. Others who are priced out can become investors, and employees can much more easily be compensated in part by shares. There are plenty of reasons why companies do splits, and they’re usually positive for a given stock over time.
I wouldn’t be surprised if Chipotle trades higher heading into its upcoming split for these reasons, as well as the fundamental reality underpinning this stock. The company is among the top restaurant brands in the U.S. and has been among the most successful at keeping prices relatively reasonable for its consumer base. So long as the fundamentals remain on track, this is a stock that certainly has the catalysts to take it higher.
It’s my view that CMG stock remains a buy right now, and while it’s certainly not cheap at around 66 times earnings, investors are clearly paying up for quality, and in this environment, that strategy makes sense.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
