Was Chipotle sell-off a buying opportunity?

Some savvy investors are shorting the stock, but the case against the Mexican burrito chain isn't wrapped up.

By Benzinga Apr 12, 2013 12:39PM
Peppers copyright imageDJ, JupiterimagesBy Tim Parker

Did everybody's favorite burrito restaurant give investors an attractive entry point or was one person's short theory reason to cash out and let "the chips" fall where they may?


On Thursday, Jeffrey Gundlach, CIO and CEO of DoubleLine Capital, said that his newest idea was a short position against Chipotle Mexican Grill (CMG).


Don't recognize the name? Wall Street insiders know Gundlach well -- and the reason this call quickly made it to all of the newswires was because of his Apple (AAPL) call a year ago.


At last year's Sohn Investment Conference, Gundlach revealed that he was shorting Apple at $610 and expected the price to drop to $425. That has turned out to be a profitable call for both Gundlach and the investors who bought into his idea.


Gundlach was going to present his Chipotle call at this year's Sohn Investment Conference scheduled for May 20. Instead, he presented it at the Yacht Club in New York on Thursday. Gundlach gave no supporting argument for his short other than, "Gourmet burrito is an oxymoron."


Maybe we'll hear his thesis on May 20, but that's more than one month away so let's look at some facts on both sides.


First, Gundlach isn't alone in his short thesis. David Einhorn announced his short position in Chipotle on Oct. 2. He said that Chipotle is in a space with a low barrier to entry where competing restaurants are opening all the time. Further, he said that the company would have to absorb large-scale health care costs associated with Obamacare. Finally, last year's drought would cause the cost of protein to rise considerably.


Shares are up 10% this year, and when you dig down past the headline numbers you find that Chipotle has an average return of 71% (TheStreet) on the $800,000 it takes to open a new restaurant and record EBITDA margins. It also saw an 80% revenue rise and a more than 100% increase in net income since 2009.


Let's not forget that much like the Apple stores, it's hard to find a Chipotle that doesn't have long lines at most times of the day, unlike its competitors. Einhorn says that Chipotle is no different than a Taco Bell owned by Yum! Brands (YUM) but an unscientific look at TripAdvisor (TRIP) would indicate that consumers clearly see Chipotle as a step above.


If the short thesis is based on valuation, there is definitely an argument: 30 times forward earnings is rich and the 50% gains each year from 2009-2011 came to an end last year when the stock fell 20%.


The chart doesn't reveal a stock that has come too far, too fast. It's been in a Dow Theory uptrend with small corrections along the way. It's holding its 50 DMA nicely and Thursday's 3.5% drop puts it right back in the middle of its channel. Purely from a technical perspective, Chipotle is attractive.


After a large move up or down, give the name at least two trading days to stabilize before committing money.


More from Benzinga

Disclosure: At the time of this writing, Tim Parker was long Apple but had no position in the other mentioned equities.




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