Is A Chipotle Short Squeeze Ahead?

Chipotle Mexican Grill, Inc. CMG short sellers may have dodged a bullet Thursday after the company followed up a big first-quarter earning beat by disclosing it received another subpoena from the state of California last year related to foodborne illness outbreaks dating back to 2016.

Subpoena Derails Rally

In a statement, Chipotle said “it is not possible at this time to determine whether we will incur, or to reasonably estimate the amount of, any fines or penalties in connection with the investigation,” but the uncertainty sent Chipotle shares tumbling 5 percent on Thursday. The stock initially traded higher by more than 4 percent after reporting earnings, revenue and same-store sales beats in the first quarter.

Chipotle short sellers may have dodged a bullet following a big quarter for the restaurant. Despite short sellers reducing their net exposure by more than 538,000 shares since mid-March, Financial technology and analytics firm S3 Partners analyst Ihor Dusaniwsky said Wednesday Chipotle remains one of the most heavily shorted stocks in the restaurant group.

Starbucks Corporation SBUX is the only restaurant stock with a larger net short position than Chipotle. Starbucks has $1.8 billion in short interest, while Chipotle has $1.5 billion. Prior to Wednesday’s report, Chipotle short sellers had taken a 45-percent hit year-to-date, enduring $663.3 million in losses, according to S3.

Short Squeeze Ahead?

The market will continue to digest the earnings and subpoena news in coming days. However, if short sellers see the subpoena sell-off as an opportunity to exit their positions, Dusaniwsky said Chipotle could see significant buying volume in coming days.

“With short covering adding to the post-solid earnings buying pressure we can expect the rally to have some legs and squeeze even more short sellers out of their positions if Chipotle’s stock price pushes through its 2015 highs,” Dusaniwsky said.

Earlier this month, Chipotle hit $721, its highest level since 2015. After Thursday’s sell-off, Chipotle shares are now up 57 percent year-to-date.

The stock traded around $676.97 per share at time of publication.

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