1 Stock-Split Stock to Buy Hand Over Fist in June and 1 to Avoid

1 Stock-Split Stock to Buy Hand Over Fist in June and 1 to Avoid

Stock distribution often generate excitement and buzz among investors, but not all divisions are the same. Some stock splits portend fantastic long-term growth stories and excellent investment opportunities, while others may be overvalued speculation stories that ultimately lead to disappointments.

Speaking of which, the June 2024 stock split schedule includes two well-known names, and I recommend buying one but not the other at this time.

The stock to buy: Chipotle

Mexican fast food giant Chipotle Mexican Grill (NYSE:CMG) is expected to undergo a 50-for-1 stock split, effective June 26, 2024. Although the split will drop the price of individual shares from $3,155 to around $63, the real appeal lies in the company’s strong fundamentals and growth prospects.

Although Chipotle is not cheap by conventional profitability measures – with a price-to-earnings (P/E) ratio of 68 and a price-to-free cash flow (P/FCF) ratio of 66 – its earnings – The report price/sales (P/S) based on 8.6x is more acceptable. This is especially notable given the robust profit margins the company enjoys in the competitive restaurant industry.

A key factor that sets Chipotle apart is its direct ownership strategy for its restaurants. This is an unusual approach in today’s restaurant industry, where most brands prefer to manage a certain number of franchisees.

Chipotle’s more hands-on approach not only supports product quality, but also fosters better employee relationships, leading to higher service standards and customer satisfaction. This commitment to quality and operational efficiency drives Chipotle’s strong financial performance and market position.

The company’s ability to innovate with its menu offerings, such as the successful introduction of lifestyle bowls and plant-based options, continues to attract a diverse customer base. Additionally, Chipotle’s strong digital strategy, which includes a popular app and efficient delivery services, has significantly boosted sales and customer loyalty. With a well-defined expansion plan and a continued focus on sustainability, Chipotle is well-positioned for long-term growth.

It’s important to note that stock splits themselves do not inherently add value to a security; they simply make high-priced stocks more affordable to a wider range of investors. Approving a split can be seen as a vote of confidence from the board in future stock gains, but it is largely accounting gymnastics. Nevertheless, Chipotle looks like a buy right now for the above reasons, making the upcoming stock split an opportune time for investors to enter or expand their position in this high-performing stock.

The stock to avoid: Nvidia

On another side, Nvidia (NASDAQ:NVDA) carried out a 10-for-1 stock split over the weekend, beginning on the morning of June 10. Although Nvidia is a leader in the generative AI boom and has an exceptional track record, the stock’s high valuation is concerning.

Nvidia shares are trading at an extremely high 70x earnings, 37x sales, and 75x free cash flow. These multiples suggest that much of the company’s future growth potential is already priced in, leaving little room for error.

In comparison, Chipotle’s valuation ratios – while also high – are less of a concern. The earnings-based numbers are comparable to Chipotle’s, but the Mexican restaurant operator’s price-to-sales ratio of 8.6x is considerably lower than Nvidia’s 37x. Profits come and go much faster than net income and can be manipulated by cost controls and accounting tricks.

For example, approximately 31% of Nvidia’s annual operating expenses are currently recorded as stock-based compensation – and this ratio is increasing. Chipotle also grows its bottom line through stock-based compensation, but that only represents 14% of the company’s operating costs. Nvidia is more vulnerable to stock price fluctuations, adding uncertainty to an already highly competitive market space.

Imagine a rival like Advanced microsystems (NASDAQ:AMD) undermining Nvidia’s dominant position in AI systems with energy-efficient and competitively priced AI accelerator chips. The sudden presence of a powerful competitor could depress Nvidia’s high stock valuation, perhaps prompting top engineers to find work elsewhere and jeopardizing Nvidia’s long-term prospects.

I recently sold some of my Nvidia shares, reinvesting the profits in another high-growth stock with a lower valuation. By diversifying my portfolio, I balance potential growth opportunities while managing risk in an unpredictable market. With or without a stock split, Nvidia certainly looks risky at current prices.

Why Chipotle is the Best Stock Split Buy in June

Nvidia’s high valuation and high stock-based compensation spending present significant risks in a competitive technology landscape. At the same time, Chipotle’s robust profit margins and strategic growth initiatives currently make it a solid investment idea.

I agree that Nvidia’s stock split also serves the same vote of confidence function as Chipotle’s, but the restaurant chain’s statement seems stronger. So if you’re looking for a split stock to buy today, I recommend taking a closer look at Chipotle while staying away from Nvidia.

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Anders Bylund has positions at Nvidia. The Motley Fool holds positions and recommends Advanced Micro Devices, Chipotle Mexican Grill and Nvidia. The Mad Motley has a disclosure policy.

1 Split Stock to Buy in June and 1 to Avoid was originally published by The Motley Fool

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