Unconventional wisdom: The rise and fall of one of the ASX’s hottest shares
Three lessons from a turbulent year.
Conventional wisdom is a byproduct of groupthink that presents solutions good enough for the average person while simultaneously not being right for any individual. You follow it at your peril. Each Monday I will challenge the investing norms that just may be holding you back from living the life you want.
Unconventional wisdom: The rise and fall of one of the ASX’s hottest shares
“I have a tattoo on my arm, that says, in ancient Greek, ‘I am certain of nothing.’ I think that’s a good operating principle.”
- Anthony Bourdain
In June of last year I wrote an article titled What can the Guzman burrito hype teach us about investing?My view was clear from just reading the article standfirst where I declared “at a certain point common sense has to prevail with any investment.”
My motivation for writing the article was my confusion at what was going on with Guzman y Gomez shares. I thought the valuation on the IPO was high. Then the shares surged from $22 to $30 after two days. Guzman continued to climb after my article. By November the shares hit $43.
From there things have been less positive for the burrito purveyor. Punctuated by an 18% drop on the 22nd of August after earnings the shares are trading at $25.52 on the 28th of August.
That is still well above our fair value $16 and the IPO price. For anyone who purchased the shares as part of the IPO it has been a roller coaster ride.
The recent struggles for Guzman don’t mean vindication for me just because the shares are lower than when I wrote the article. And if the shares continue to fall and I am proven ‘right’ it is irrelevant as I have no money tied to the fortunes of Guzman. Given the fickle nature of the share market I may be proven ‘wrong’ before the proverbial ink dries on this article.
I think it is far more useful to try and find the lessons in the wild ride Guzman shareholders have experienced.
The prospects for Guzman
Prior to the Guzman IPO Morningstar analysts Johannes Faul and Lochlan Halloway issued a detailed report outlining their view on the fair value of Guzman shares. I took a different approach more in line with how many individuals invest.
I simply looked at the valuation levels of the Guzman shares and back solved the earning growth rate needed for the shares to trade at the same multiple as their peer restaurants in ten years.
You can read the original article but the summary is that to reach the valuation that McDonalds and Dominos were trading at a year ago would require 54% and 39% earnings growth annually respectively. In that scenario the Guzman shares would still trade at the roughly $30 level they were when I wrote the article.
I didn’t think that level of earnings growth was possible. The speed that you can grow earnings in the restaurant business is limited as it takes time, effort and expense to keep opening new locations. The rollout of new locations must be carefully managed to prevent cannibalisation of existing locations. And the total addressable market in Australia is limited by the population.
I think my argument is common sense. But something was driving the shares higher. And that was – depending on your view - the expectation / hope / wishful thinking that Guzman would hit it big in the US. America is truly a city upon a hill – at least when it comes to fast food.
Lesson number one: Figure out the hypothesis that is dictating share price movements
Very few individual investors are going to create a discounted cash flow model. And that is ok. But for any share that you buy you should figure out what investor expectations are baked into a share price.
You need to understand what investors expect because falling short of expectations, meeting them or exceeding them will dictate how the share performs. My back of the envelop maths made it obvious that given Guzman’s valuation it would take more than success in Australia for the shares to keep climbing.
Mathematically this was clear but we’ve seen further proof in the recent sell-off. It was mounting losses in the US and management comments that next year would be no better that sent investors running for the exits.
I think Guzman will continue to do quite well in Australia. If the valuation reflected the opportunity in Australia I might consider the shares. But it doesn’t. And I just don’t buy the hypothesis that Guzman will succeed in the US.
Mexican food is entrenched in the US culinary landscape to a degree well beyond anything we see in Australia. There are over 80k Mexican restaurants in the US. That is 11% of total US restaurants. In fast casual chains Chipotle is dominate and has established a wide-moat through the strength of their strong brand. Plus – at least in my opinion – Chipotle just tastes better.
Lesson two: Don’t assume every investor has the same motivation, time horizon or risk tolerance as you
What inspired me to write the original article was an email I received complaining about our view of the share price two hours after the IPO. Part of the reason I was incredulous about this complaint was because it represented such a departure from the way I view investing.
I think investing is a long-term endeavour and that is what I’m focused on with my own portfolio. Our analysts also take a long-term view. To me it makes little sense to focus on the short-term because of how difficult it is to guess how a share will perform over short periods.
I wholeheartedly believe a long-term focus is the best way to be succesful. I am not alone in this opinion. Yet there are many people who don’t focus on the long-term. They have different goals and sources of competitive advantage as investors.
These investors are different from me. They can include professional investors and amateur traders. They may be more interested in factors like momentum and ignore fundamentals. All of that is ok. There are lots of different ways to be successful.
For many investors it made perfect sense to buy Guzman at $30 because all they cared about was the share price going higher in the next few months. Those investors were probably thrilled with the subsequent price climb. Hopefully they got out in November.
Where we get into trouble as investors is when we let the actions of investors with other motivations influence our own. One example was the email I received.
As an investor focused on the short-term the man who emailed me thought our analysts were wrong because the share price spiked after the IPO. He was using an equity research report focused on the long-term to tell him if he would make money within hours of an IPO.
The same thing can happen as a long-term investor. Letting short-term price movements influence the actions you take makes little sense. Taking advice from investors with different goals and approaches is unhelpful.
This is easy for me to write. It is hard to do. As humans our first reaction is often driven by emotion. After those emotions have subsided we take a more intellectually rigorous examination of what happened. The problem is too many investors act in the emotional phase.
I’ve found it helpful to remind myself that many of the people causing short-term price movements have different motivations. This allows me to ignore volatility. I also like to give myself time to let my emotions die down before making decisions. My mantra is decide if I’m right or wrong over a time frame that aligns with my investment horizon.
Lesson three: Higher valuations make stocks riskier
Investors tend to think that price increases make an investment safer. This is called recency bias. We expect whatever has recently happened to continue. And this is why investors chase performance.
Valuation levels reflect investor expectations for the future. High valuations mean high expectations. At a certain point a share can have such a high valuation that there is no room for error. Anything short of perfection is punished.
This is what happened with Guzman. Judging by the sell-off you would think Guzman reported terrible results. This is far from the case. Earnings grew 152% in fiscal 2025. The problem was the shares were trading at a price to earning ratio of 207.
I like to buy shares when investor expectations are lower. Low expectations are easier to surpass. The pressure from a challenging environment tends to motivate and inspire people to fix whatever is going wrong.
Final thoughts
Far too often investors focus on investments and ignore investing. Guzman shares are an investment. Investing is the process you go through to evaluate if the shares can help you achieve your goals.
There are lots of factors that go into that decision. But valuation must play a role. A share doesn’t have to be dirt cheap to buy it.
In many cases too much of a focus on relative valuation measures lets great companies get away. But in the case of Guzman I just don’t think the valuation can be justified.
Perhaps you feel differently. Let me know at [email protected]
I have a favour to ask
The book Shani and I wrote is currently in presale which is an important time to show our publisher and book retailers there is interest. If anyone would like to support this project you can buy the book now. Thanks in advance!
Our book Invest Your Way will be released by Wiley on October 9th in Australia.
Invest Your Way is a personal finance book that combines foundational investing theory, real-world application and our own experiences. It is designed to help readers create a financial plan and investing strategy that is tailored to their unique goals and circumstances.
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What i’ve been eating
I had a quintessential Nashville day. I spent some time listening to music in the honky tonks. I ate some Nashville hot chicken at Hattie B’s. But first I went to Martin’s BBQ for lunch. With multiple locations throughout the Nashville area Martin’s is my go-to for BBQ when I’m in town. Tennessee BBQ is known for using pork and a using a tangy tomato-based sauce. This differentiates it from other regional BBQ variations.
Martin’s has some good pulled pork. Some excellent sausage. But tops on my list is the ribs. Here is a slab of ribs, some green beans which are cooked with pulled pork and two orders of mac & cheese. Why two orders? Because it is mac & cheese.
