S3 Analytics: Chipotle Shorts up $55 million on Norovirus Illness

For Chipotle Mexican Grill Inc. (CMG US) it must seem like déjà vu all over again as it was forced to close one of its Virginia restaurants due to a norovirus outbreak that made several of its patrons ill. CMG stock was down as much as 7.5% in intra-day trading and closed down $17.02/share, or 4.34%. Even though this looks to be an isolated outbreak, investors and Chipotle customers can remember the E. coli and salmonella outbreaks in the fall of 2015, which drove CMG’s stock price down almost $350/share, or 46%. Chipotle’s executive director of food safety, Jim Marsden, assured the public that the norovirus illness did not come from Chipotle’s food supply and “it is safe to eat at Chipotle.”

CMG’s short interest hit its year-to-date high of $2.38 billion on April 20^th as its stock price was up 26.8% for the year. Soon afterwards, on May 16^th, CMG hit its year-to-date high of $496.14/share, up 31.5%. Short sellers continued to cover their positions, buying to cover over one million shares, even as CMG’s stock price continued to weaken. Short interest in now $1.3 billion, down 35% for the year and down 47% from its high point. Timing for short sellers this year was less then optimal, they built their positions as CMG’s stock rallied, and bought to cover as CMG’s stock declined. As of 7/17 shorts were down $158.7 million for the year, for a loss of 8.25% even though the stock was only up 3.89% for the year.

Today’s drop in stock price cut CMG short seller’s losses by just over a third. Shorts are up $55 million in mark to market profits today, reducing their year-to-date losses to $103.7 million for the year, or down only 5.4%.

Total short interest in the restaurant sub-industry is $12.03 billion, up $396 million in 2017. With Chipotle short sellers covering almost a third of their positions this year, they have relinquished their top spot to Starbucks Corp. (SBUX US) whose short interest nearly doubled this year.

Even though today’s trading volume, at 7.6 million shares, was a 2015-2017 high, we have not seen a large amount Chipotle short sales executed today. It seems that today’s volume was made up of long shareholders selling their stock in the morning, fearing a repeat of 2015–2016’s three month stock price slump, which pushed Chipotle’s stock price down to $362.40 in the morning followed by long shareholders buying the oversold stock and pushing Chipotle’s stock price back up to $374.98. Interspersed between this long selling and long buying were less than 500,000 shares of short selling trying to take advantage of the intra-day price moves.

Unless the norovirus outbreak spreads to other Chipotle locations, we should not see significant additional short selling, but there might be some additional short covering to realize some of the profits generated by today’s price drop.

Want deeper insight into the above analysis?

Contact: Ihor.Dusaniwsky@S3Partners.net

Head of Data Analytics, S3 Partners, LLC

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