Stephen Frankola sends: I”ve posted these thoughts again and again, but as I wrote about it for TradeKing’s new community, I decided I’d repost some thoughts here:

The differences in trading between BWLD and CMG over the past four months baffle me. At the beginning of that period, BWLD traded with a forward P/E in the 20s, while CMG’s was 55x.

BWLD reported mildly disappointing earnings (though not disasterous - just a slight downward adjustment to forward guidence) and lost half of its value (it’s up 20% off the bottom now). Chipotle was up immediately after its earnings (which weren’t anything excellent), set a new record high, but is also down now, about 10% lower than its pre-earnings level (in October 2007).

Going into CMG’s earnings (which are released next Thursday), I’d be short, or at least sit on the sidelines. They still have a forward P/E of 40, which is clearly pricing in exceptional growth. Though they really haven’t failed to disappoint yet, I think a rising cost of raw materials and pressure on the consumer may cause them to guide downward, or at least be cautious. In a high-flying stock, that can mean share price implosion - look at VMWare just a few weeks ago.

I’m long BWLD (shares and March $25 calls, purchased when the stock was at $22), as I think that they should make a great recovery. Their forward P/E is 18, which is very cheap for a company growing at 20% annually. YUM and MCD have forward P/Es of 16 and 15 (respectively), so for a small, growing company like BWLD, 18 is dirt-cheap.
In two weeks, CMG may be at $100. In a year, BWLD may be back at $35.

I also initiated a small position in Activision (ATVI) a few weeks ago when the share price dropped below the price that Vivendi (the company buying ATVI) is offering - $27.50.

As the markets have pulled back a little over the past week, Activision has dipped again. As of this morning, it was a little under $26.

So, in anticipation of good earnings today, I bought some Activision calls. The February 27.5 calls were only at 30 cents/contract, so though the time frame is pretty short, I pulled the trigger.

I anticipate great earnings today; Activision led holiday sales on many systems with Call of Duty 4 and Guitar Hero 3. I believe that they’ll beat (or at least not disappoint), people will remember that they’ll be getting at least $27.50 for their shares in a few months, and the price will pop up a few dollars within the next few sessions.

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