Should You Buy This Growth Stock Down 27% and Hold for the Next 10 Years?

Investors continue to deal with heightened uncertainty regarding the direction of the economy. The overall stock market has pulled back. Among the volatility, there are some high-quality companies that are feeling the pressure.

Consider Chipotle Mexican Grill (NYSE: CMG). As of March 31, this growth stock traded 27% below its all-time high from June 2024, even though it has soared 287% in the past five years. Maybe there's an opportunity here.

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Should you buy shares on the dip and hold them for the next 10 years? Here's what investors need to know.

Clear growth playbook

Chipotle has an impressive track record of growth. Between 2019 and 2024, the company's revenue and net income increased at compound annual rates of 15% and 34%, respectively. Even considering the pullback, it's no wonder the stock has done so well for investors.

The growth playbook is straightforward. Management has rapidly opened new stores. At the end of last year, Chipotle had 3,726 locations, which is a considerable increase over the past decade. The company has a small presence in Europe. It has even partnered with a franchisee group to open restaurants in the Middle East.

Innovation is another part of the strategy. Chipotle occasionally introduces new menu items, like the smoked brisket in 2021 and the recently launched chipotle honey chicken, to drive increased foot traffic. There's also innovation happening behind the scenes. The company is testing the Autocado, a tool that can cut and peel avocados much faster than humans, which can save time.

Additionally, Chipotle has started to build out more drive-thru locations. Last year, 257 of the 304 new stores that opened were designed with a drive-thru called a Chipotlane, adding convenience for customers.

Another part of the company's growth plan centers on boosting adoption of its loyalty program. As of last summer, Chipotle counted more than 40 million rewards members, a valuable customer cohort that probably spends more money and visits restaurants more frequently than non-members. It provides management with a valuable channel to collect consumer data that can drive marketing and product decisions.

In an advantageous position

There are always concerns about inflationary pressures impacting food and labor costs, which are two large expense categories that any restaurant has. Chipotle has dealt with higher prices for key inputs, like dairy, protein, and paper products, in the past few years. And there's always wage inflation to think about as well.

Luckily, Chipotle possesses a key trait that even the great Warren Buffett would appreciate: pricing power. The executive team has increased menu prices on numerous occasions since 2021 to combat cost inflation. It just announced a nationwide price hike in December last year.

This has supported profitability while also not getting in the way of same-store sales growth, which was up 7.4% in 2024. It all comes down to providing value to consumers.

However, the current macro environment doesn't necessarily paint the rosiest picture. Fears about a recession have pressured consumer confidence. Consequently, people could be more discerning when choosing where to spend money on food, opting to cook at home instead of ordering out. It makes sense why management expects low-to-mid single-digit same-store sales growth in 2025.

What the future might hold

Chipotle has been a market-thumping stock. It has a track record of stellar financial performance. And the leadership team has been able to navigate inflationary pressures.

However, investors should temper their expectations. That's because the stock still looks richly valued, even though it's 27% off its peak. Shares trade at a forward P/E ratio of 39.4, implying lots of optimism about the company's prospects. Given the uncertain economic backdrop, there's a higher likelihood Chipotle reports same-store sales or earnings, for example, that disappoint investors. This adds downside risk.

As a result, buying and holding the stock for the next 10 years may not be a smart move right now, especially if you're trying to achieve returns in excess of the broader market.

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends the following options: short March 2025 $58 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.