The Motley Fool: After E. coli debacle, Chipotle readies for restaurant growth

The Motley Fool Take

As you’ve probably heard, Chipotle Mexican Grill (NYSE: CMG) has been going through a rough patch, experiencing an E. coli outbreak across several states, a norovirus incident and ongoing federal investigations. Such things tend to send stocks falling, and Chipotle’s stock was recently down about 30 percent over the past year.

So is Chipotle a good buy now? Well, it all depends on whether you see the company’s troubles as temporary ones or permanent ones. One promising sign is that the Centers for Disease Control have said that the E. coli outbreaks “appear to be over.”

Meanwhile, Chipotle recently released its worst quarterly earnings report ever, featuring revenue down 7 percent year over year. Still, there’s reason to be hopeful about Chipotle’s future. The company is returning its focus to marketing, implementing its food safety program and rebuilding sales.

A number of Wall Street analysts have upgraded their ratings on the company, citing recovering sales and a general willingness among consumers to return to the eatery. Management, confident of that, is investing heavily to ensure that it’s ready to meet that demand, planning to open 220 to 235 new restaurants in 2016.

While Chipotle’s road may be bumpy in the next few quarters, it has a good chance of returning to its former trajectory of strong profit growth. Consider keeping an eye on it. (The Motley Fool has recommended and owns shares of Chipotle.)

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Q: What characterizes “Islamic investing”? - S.H., Pueblo, Colorado

A: It has certain restrictions. Think of “socially responsible investing,” where investors avoid certain kinds of companies, such as those involved in tobacco, guns, alcohol or defense. Similarly, investors who adhere to Islamic tenets also screen out certain industries. They will generally avoid companies focused on alcohol, gambling, pornography and pork - and often weapon, tobacco, hotel and media companies, among others.

Islamic finance is also known for a prohibition against paying or earning interest. Thus, Islamic investors will not invest in many financial services companies such as banks and insurers. Even nonfinancial companies might be rejected if they receive a significant sum of interest in their income.

Some Islamic investors get around that by donating to charity the portion of earnings derived from interest. While mutual funds will typically keep cash in interest-bearing accounts until it’s invested, Islam-compliant mutual funds may instead just keep the cash as cash.

The avoidance of financial companies - for any reason - served investors very well during the big credit crisis some years ago. Shares of Citigroup, for example, plunged 73 percent in 2008 and Bank of America dropped 60 percent. (Some other financial giants went out of business entirely.)

Islamic investors must avoid bonds, because of their interest payments, but they can seek income from real estate investments and other asset-based income-producing investments.

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A: The PBGC is a federal agency that insures benefits in private traditional pension plans — not defined contribution plans, such as 401(k)s. You can learn more at pbgc.gov, or call 800-400-7242.

My Dumbest Investment

My worst investment decision (so far) was getting out of Facebook at a loss - but I have done very well with other stocks, such as Westinghouse Air Brake Technologies, Costco, TransDigm Group and Berkshire Hathaway. As long as you have more gains than losses in your portfolio, over time it will grow beyond your expectations. - L.H., online

The Fool responds: You’re right; losses are inevitable in investing, and they can be outweighed by gains. Better still, the more we read up on and learn about investing, the fewer mistakes we may make, and the smaller our losses might be.

Facebook, like some other dynamic fast-growers, often seems overvalued. The stock recently sported a price-to-earnings (P/E) ratio near 77, well above the S&P 500’s P/E ratio of 20. That certainly seems astronomical, but Facebook’s P/E ratio topped 100 in 2015 and 140 in 2013. Moreover, this is a company with fat net profit margins near 20 percent, and revenue and earnings growing by annual averages of 55 percent and 43 percent, respectively, over the past five years.

Fast-growers with promising futures often command — and maintain — lofty valuations, at least during their growth spurts. Many expect Facebook to find lots of ways to make money off its billion-plus daily users. The company was recently raking in about $18 billion annually, while generating $6 billion in free cash flow.