How Contrarians Cashed In on Chipotle in 2017

Subscribers who followed our Top Stocks for 2017 predictions racked up some big winners last year, as half of our 10 trades generated returns in excess of the S&P's 20% move. Among the short positions we recommended was Chipotle Mexican Grill, Inc. (NYSE:CMG), which wound up losing 23.4% after our bearish recommendation. Here's a closer look at what initially drew us to CMG stock for a short trade, and how the pick panned out.

When we recommended the short position at the end of 2016, Chipotle stock had given up roughly half its value since peaking in mid-2015, and was struggling to recover from the burrito chain's initial string of foodborne illnesses. Short sellers were piling on, and had quadrupled their CMG positions since November 2015. However, most analysts maintained "buy" ratings, leaving the stock vulnerable to downgrades, and options buyers were call-heavy -- suggesting the bearish bandwagon was far from crowded.

Chipotle stock burst higher to start the second quarter, with help from some optimistic chatter out of CNBC's Jim Cramer and a well-received earnings report. However, after running into a round-number wall around the $500 level in mid-May, it was all downhill for CMG shares. Concerns about rising marketing costs in late June eventually sent the stock back down to earth, and back below its 200-day moving average.

Re-emerging concerns about health safety sent CMG crumbling further in late July, after a Chipotle customer tested positive for norovirus, and video showed rats inside a Texas restaurant wall. In October, meanwhile, the stock suffered a massive bear gap to five-year lows after disappointing earnings. News of the restaurant's CEO search helped the shares recover some of those losses in late November, but CMG ultimately struggled beneath the $320 level -- where it was trading before the earnings gap.

In conclusion, Chipotle stock ended 2017 with a loss of more than 20%, marking its third straight year of a loss that steep. As analysts changed their tune on CMG, and as optimism among options traders unwound, the selling pressure on the beleaguered shares intensified, resulting in a big win for our short position.