The Stock Split Is Over for Chipotle Mexican Grill and Shares Have Quickly Dropped More Than 10%. What It Means for Investors. | The Motley Fool (2024)

At least some investors might be looking at the wrong things.

On June 26, restaurant company Chipotle Mexican Grill (CMG -3.41%) did a 50-for-1 stock split -- one of the largest splits investors have ever seen. Anyone who owned just two shares of the company before now owns 100, thanks to this highly publicized event.

However, Chipotle stock is down about 11% from the all-time high that it reached back in June, with much of the drop happening after the stock split. In fact, it's the largest pullback for Chipotle stock in almost a year.

I have reason to believe that some Chipotle shareholders bought the stock entirely because of the stock split. A 2023 study published by the Journal of Risk and Financial Management found that a stock's trading volume usually increases with a stock-split announcement. And the trading volume generally goes up enough after a split that it's reasonable to assume that there are more shareholders after the split than there were before.

Therefore, I believe some investors own Chipotle stock because it just did a huge 50-for-1 split. And these investors are likely upset to already be down sharply.

Why isn't Chipotle stock surging after the split?

The true value of a company isn't found in its stock price, but rather in its market capitalization. Each share represents a small, fractional ownership piece of the business. The market cap adds up the price of all the shares outstanding to arrive at the entire worth of the company.

Let's assume that two different stocks both traded at $10 per share. If the first company had 1 million shares and the second company had 1 billion shares, the former would have a market cap of only $10 million whereas the other would have a market cap of $10 billion. In other words, the stock prices would be the same. But one company would be worth 1,000 times more than the other because it would have 1,000 times as many shares.

When Chipotle split its stock, it instantly had 50 times as many shares as before. But it didn't do anything to create shareholder value nor was any value lost. This is because the stock price was also instantly about 1/50th what is was before. In other words, it was all a wash from a market-cap value perspective.

It may not have created any shareholder value with the stock split but Chipotle did create plenty of buzz. From the time the split was announced through when the split actually happened, Chipotle stock outperformed the S&P 500 by a wide margin -- investors were clearly excited.

The Stock Split Is Over for Chipotle Mexican Grill and Shares Have Quickly Dropped More Than 10%. What It Means for Investors. | The Motley Fool (1)

CMG data by YCharts

Now that Chipotle's stock split is in the past, excitement is ebbing, which has led to the lower stock price.

What to do now

Don't misunderstand: It was never a foregone conclusion that Chipotle stock would rise with the announcement of the split and then fall afterward. Investor sentiment can drive stock prices in any direction over the short term and sentiment is intrinsically unpredictable.

The actionable takeaway from all of this for investors is that there are things that can drive a stock's price over the short term. But sometimes these are things that don't actually create value, such as with stock splits. Therefore, these aren't things that should demand any focus.

Rather, investors in Chipotle (and other stocks) should develop an investment thesis -- a pithy explanation of how a company can create value in coming years. While an investment thesis plays out, market sentiment will rise and fall, creating volatility with a stock price. But those who calmly hold through the volatility can be rewarded with big gains.

Over the long term, weightier matters such as revenue growth and profit margin improvements have a much greater impact on a stock's price than a split. And because this is true, long-term investors need to focus on those things.

For Chipotle shareholders who only bought shares because of the stock split, I'd say that you have more research to do before deciding whether this is a stock that you want to own for the long term. But allow me to give you a head start by explaining why the company can at least increase its revenue.

Chipotle owns all of its U.S. restaurants and it had almost 3,500 as of the end of its first quarter of 2024. However, in coming years, it plans to open hundreds of additional locations. Because these will also be owned by the company, it's likely that the company's revenue will meaningfully grow. And revenue growth is one of the most important things for a winning stock.

For Chipotle shareholders who do have an investment thesis that's unrelated from the stock split, be encouraged that nothing has fundamentally changed with the business. The stock is just down as sentiment adjusts like it always does.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

The Stock Split Is Over for Chipotle Mexican Grill and Shares Have Quickly Dropped More Than 10%. What It Means for Investors. | The Motley Fool (2024)


Why is Chipotle stock falling? ›

Shares of Chipotle (NYSE:CMG) have been on an overall downtrend since peaking on June 17 at $69.26 per share. This is likely due to several factors, such as its high valuation, peaking same-store sales, and a pause in menu price hikes, according to four-star UBS analyst Dennis Geiger.

Why does stock price fall after stock split? ›

Stock splits can improve trading liquidity and make the stock seem more affordable. In a stock split the number of outstanding shares increases and the price per share decreases proportionally, while the market capitalization and the value of the company do not change.

Do stock splits indicate that a company is doing poorly? ›

Are Stock Splits Good or Bad? Stock splits are generally done when the stock price of a company has risen so high that it might become an impediment to new investors. Therefore, a split is often the result of growth or the prospects of future growth, and it's a positive signal.

What happens to a stock when it splits? ›

A stock split is when a company divides and increases the number of shares available to buy and sell on an exchange. A stock split lowers its stock price but doesn't weaken its value to current shareholders.

Why is Chipotle in trouble? ›

The underlying issue behind the Chipotle scandal was a failure in food safety management. Deficiencies were identified in food handling procedures, employee hygiene practices, and supply chain monitoring. These shortcomings allowed for product contamination and the subsequent spread of infections among customers.

Who owns most of Chipotle stock? ›

What percentage of Chipotle (CMG) stock is held by retail investors? According to the latest TipRanks data, approximately 88.20% of Chipotle (CMG) stock is held by retail investors. Who owns the most shares of Chipotle (CMG)? iShares owns the most shares of Chipotle (CMG).

Are stock splits good or bad for shareholders? ›

It's basically a draw, and the value of your investment won't change. However, investors generally react positively to stock splits, partly because these announcements signal that a company's board wants to attract investors by making the price more affordable and increasing the number of shares available.

Is Chipotle stock splitting? ›

NEWPORT BEACH, Calif., June 26, 2024 /PRNewswire/ -- Chipotle Mexican Grill, Inc. (NYSE: CMG) today announced that its 50-for-1 stock split was effective after market close yesterday and its shares will begin trading on a post-split basis today.

Is it better to buy stock before or after a split? ›

Do stock splits benefit investors? – It's nice to own more shares after a split, since the reduced per-share price might mean there's room for greater potential price growth. But investors shouldn't buy a stock simply because they hope it'll rise in price after a split.

Is Chipotle a good stock to buy? ›

Chipotle has a consensus rating of Moderate Buy which is based on 18 buy ratings, 8 hold ratings and 0 sell ratings. What is Chipotle's price target? The average price target for Chipotle is $66.88. This is based on 26 Wall Streets Analysts 12-month price targets, issued in the past 3 months.

Do you make money when a stock splits? ›

A stock split doesn't add any value to a stock. Instead, it takes one share of a stock and splits it into two shares, reducing its value by half. Current shareholders will hold twice the shares at half the value for each, but the total value doesn't change.

Do stocks usually go up or down after a split? ›

Splitting the stock brings the share price down to a more attractive level. The actual value of the company doesn't change but the lower stock price may affect the way the stock is perceived and this can entice new investors.

Why is Chipotle stock so high? ›

CMG's stock growth can be attributed to Chipotle's strong financial performance and the recent 50-for-1 stock split announcement. CMG's positive performance can be attributed to restaurant-level operating margin expansion, menu innovation, price increases, and good execution of the company's digital strategies.

Do stock splits decrease the number of shares you own? ›

This results in an increase in the total number of shares outstanding for the company, though no change in a shareholder's proportional ownership. Normally, a stock split will reduce the price per share of each share in proportion to the increase in shares.

Should I sell before a reverse stock split? ›

Selling before a reverse stock split is a good idea, but selling after the reverse stock split is not. Since you can sell before and after a reverse stock split, selling during one is optional. The main advantage of selling before the reverse stock split is that you don't have to wait around for it to happen.

What is the future of Chipotle stock? ›

Stock Price Forecast

The 28 analysts with 12-month price forecasts for CMG stock have an average target of 64.34, with a low estimate of 41.4 and a high estimate of 77.76. The average target predicts an increase of 11.80% from the current stock price of 57.55.

Is Chipotle stock a buy or sell? ›

Chipotle Mexican Grill stock has received a consensus rating of buy. The average rating score is and is based on 69 buy ratings, 30 hold ratings, and 1 sell ratings.

Is Chipotle doing well financially? ›

Indeed, in its first-quarter earnings report, Chipotle disclosed 14.1% year-over-year revenue growth to $2.7 billion. Earnings surged 37% to $13.37 per share. For the second quarter, analysts expect revenue to jump 16% and earnings per share to rise by 23%.

Why is CMG falling? ›

Key Takeaways. Chipotle Mexican Grill shares continued to fall Monday after setting a record high when shareholders approved a 50-to-1 stock split in June. The Mexican fast-food chain has been accused by some customers of reducing the size of its burrito bowls, which CEO Brian Niccol denies.

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