Owning momentum stocks is tricky business.  So intoxicating the potential gains though many investors still fall prey to chasing the next hot stock.  It is often a fools game and sure way to lose money.

There is a time and a place to buy momentum, but in the grips of a recession is not that time.  I much prefer to own momentum stocks in the later stages of an economic cycle.  At that time profits are flowing and growth can appear to be perpetual.

We know that is not the case, but we can go for the ride on the rocket ship trusting the irresistible urge of others to follow suit.  The key is to know when to get out.

Case in point is the latest hot stock, Chipotle Mexican Grill (CMG).  This fast food spin-off of McDonald’s Corp (MCD) became an independent company in late 2006.  At the time the Mexican meal in a tortilla company was ramping up its business to great success.

The momentum crowd took notice.  Once shares became available to the public they quickly ascended from an IPO price of approximately $50 to a high of $150 in January of 2008.

This quick triple had shaky legs for certain, but notice that the timing of the rise happen to correspond to the latter innings of an economic cycle.  CMG was the perfect momentum play for Rational investors.

Once the economy’s performance became a major question, investors should have jumped ship.  Businesses like CMG depend upon a strong economy to fuel the momentum and justify premium valuations.  Weakness therein is a recipe for disaster.

Sure enough the fast money crowd started abandoning ship at the turn of the year.  CMG stock lost a third of its value to $100 over the first five months of the year.  Those that failed to sell at the peak still had time to exit.

Yes a double from $50 is not as good as a triple, but it sure beats losing it all.  Again that’s where the intoxication of these stocks has a particularly strong allure.  Investors tend to have a hard time letting go of momentum always believing that glory days of past will return.

Well I have news for you.  In most cases momentum does not return.  In fact the opposite usually occurs.

Indeed, CMG continued to bleed over the summer losing another $25 in value.  Well, now what do we do.  Our gains are all but eliminated and yet hope still is strong.

That hope would be misguided, of course.  Today the burrito king, CMG announced that the weakening economy was impacting its business.  The company now expects third quarter results to be lower than the $.62 earned in the third quarter last year.

Such results would be a far cry from the now expected $.72 that Wall Street analysts had been predicting for CMG.  The response by the market was swift.

Shares of CMG dropped more than 20% on the news during today’s trading session.

So here we are with CMG now trading at close to its $50 opening price as a publicly traded company.  This former momentum star has given up nearly all its gains.  What was once a triple is now a company struggling with slowing sales and lower profits.

Does that mean the end of the CMG story?  No, but it is a cautionary tale.  Be wary of momentum stocks when the economic cycle is in a trough as we are now.