Through Berkshire Hathaway , Warren Buffett owns dozens of stocks across various industries. But there's one thriving business in a sector he's familiar with that the conglomerate doesn't have a stake in.
That company is Chipotle Mexican Grill (NYSE: CMG) . Its shares have skyrocketed 348% in the past five years (as of June 26), easily beating the broader S&P 500 . Credit goes to the business's strong fundamental performance.
Here are three reasons why the Oracle of Omaha should buy this top restaurant stock, and one obvious reason why he'd regret that decision.
Appreciating strong brands
Some of Berkshire's largest holdings are in companies such as Apple , American Express , and Coca-Cola . These are well-recognized global brands that differentiate these businesses and their offerings in their respective industries.
While Chipotle's brand isn't as strong as those three, it's highly regarded in the restaurant space. According to Piper Sandler 's spring 2024 Taking Stock With Teens survey, Chipotle was ranked as the third most popular restaurant among Generation Z in the U.S. It moved up one spot from the fall of last year.
This business pioneered the fast-casual dining concept, to the point where there are copycats with different types of cuisine. Chipotle's growth has been excellent, as its current store count of 3,479 is almost 40% larger than five years ago. Unsurprisingly, sales have also propelled higher.
Taking care of the customer
Any consumer-facing business does better when it prioritizes the needs of its customer base. Quality, convenience, and price are the top factors these customers consider when deciding where to buy their food. Chipotle does well at all three.
In recent years, the business has leaned heavily on technology to increase accessibility and convenience for consumers. Chipotle's revamped rewards program was launched in March 2019. Despite a short history, it has already amassed 40 million members. Not only can Chipotle's mobile app and loyalty program drive loyalty and repeat purchase behavior, but it also provides a useful tool to collect data and direct marketing initiatives.
Handling inflationary pressures
The key theme that characterizes the economy over the past three years has been higher-than-normal inflation . The restaurant industry might be one of the most severely impacted, as costs for food, labor, and paper supplies have all increased.
Chipotle has successfully navigated this unfavorable backdrop by occasionally raising its menu prices in recent years. During the first quarter of 2024 (ended March 31), the company posted 7% same-store sales growth, part of which was driven by higher ticket sizes. The benefit has flowed through to the financials.
Buffett believes great businesses have pricing power . "If you have to have a prayer session before raising the price by a tenth of a cent, then you've got a terrible business," he once said.
One obvious risk
I don't think many people would disagree that Chipotle is a quality enterprise. Even the Oracle of Omaha probably has the same perspective. So, why doesn't Berkshire buy the stock?
It all comes down to valuation, in my opinion. As a result of their impressive rise, shares trade at a price-to-earnings ratio of 70.1. This is in nosebleed territory. It indicates the market's extreme optimism surrounding the company. In other words, shares appear to be priced for perfection. If Chipotle misses revenue and earnings guidance by even a tiny bit, investors could run for the exits.
Buffett would likely regret buying Chipotle stock because it trades at such a steep valuation. I'm sure most value-focused investors think the same way.
American Express is an advertising partner of The Ascent, a Motley Fool company. Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, and Chipotle Mexican Grill. The Motley Fool has a disclosure policy .
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