How Einhorn telegraphed his Chipotle short
The investor's short trade took the market by surprise, causing Chipotle shares to drop nearly 5% in two days.
By Antoine Gara
Chipotle Mexican Grill (CMG) shed as much as $1 billion in market cap in Tuesday trading, with shares falling more than 4% after famed short seller David Einhorn of Greenlight Capital unveiled the high-flying restaurant stock as a new short position, citing the company's high price-to-earnings multiple and a competitive landscape marked by a resurgent Taco Bell.
Shares dropped less than 1% Wednesday to trade at $301.52 in the afternoon.
At the Value Investing Congress in Manhattan on Tuesday, Einhorn reiterated the short case for Green Mountain Coffee Roasters (GMCR) and laid out why he's bullish on the earnings prospects of General Motors (GM) and Cigna (CI) in spite of the political and regulatory uncertainty hanging over both stocks. However, Einhorn's most notable presentation was on Chipotle Mexican Grill -- a battleground stock -- where he's unequivocally now in the bear camp.
Einhorn's short trade took the market by surprise, and has added to a re-pricing of the stock from all-time highs above $440 hit earlier in 2012. The stock is down 27% in the past three months since its last earnings report disappointed some investors.
But investors could have seen Einhorn's short coming, even if rumors about Einhorn's stock positions can often be misleading, as the hedge funder noted in his Tuesday presentation.
In Greenlight Capital's most recent quarterly disclosure of its investments with the Securities and Exchange Commission, the hedge fund's only put position -- an options trade predicting a stock fall -- was in Chipotle. The filing shows that as of the quarter ended June 30, Einhorn was short Chipotle, even as the conversation centered on speculation and rumor.
According to the SEC filing, Greenlight disclosed three separate put positions worth a total face value of nearly $19 million, as of June 30. While it's still unclear how big Einhorn's bearish bet is now that he's publicly made the Denver Mexican food chain his next short play, investors could have seen a hint of Tuesday's selloff coming with the appearance of the Chipotle put.
The only other options position disclosed by Greenlight was a call option position on Microsoft (MSFT) shares worth a face value of $153 million. According to SEC data compiled by Bloomberg, Apple (AAPL) remains Greenlight's biggest stock position. At the Value Investor Congress, Einhorn said his long-thesis on Apple was "largely unchanged," when asked by an investor in the audience. (Microsoft owns and publishes Top Stocks, an MSN Money site.)
For those who are still bullish on Chipotle Mexican Grill in spite of Einhorn's comments, but are concerned by his ability to identify value traps like Green Mountain Coffee Roasters, there's some reason for hope.
Einhorn's condemnation of Chipotle Mexican Grill centers on a thesis that the company's price-to-earnings multiple appears rich, as players like Yum Brands (YUM) try to enter the territory. That contrasts sharply with Einhorn's short position in Green Mountain Coffee Roasters, which he said was about competition and poor cash flow dynamics, in addition to a highly critical view of the company's accounting and management.
In fact, Einhorn's short thesis on Chipotle seemed to be as much about a multiple analysis of the company's stock, as it was about Greenlight's proprietary insight into consumer eating habits.
Einhorn said Greenlight conducted a survey of roughly 4,000 Chipotle and Taco Bell customers to see how both chains stacked up -- only to find that discriminating consumers didn't see much of a distinction between the two chains in spite of big pricing differences. As Taco Bell, which is owned by Yum Brands, rolls out its "Cantina" line of healthy Mexican food dishes, Einhorn's short position is predicated on the company winning over price-conscious Chipotle customers.
To be seen is whether Einhorn's analysis as a gourmand stacks up to his discerning ability to comb through financial statements for overvalued and undervalued companies. Einhorn also spent the first part of his presentation imploring investors to do their own homework, instead of following him blindly into or out of stocks based on speculation or disclosures over Greenlight's holdings.
For more about what Einhorn said at the Value Investing Congress, see why he's kicking the tires on GM. See why Bill Ackman may have forgotten about his J.C. Penney and Procter & Gamble overhaul investments and why Jana Partners' Agrium breakup pitch is a shale oil and gas bet for other big investing ideas presented at the Value Investing Congress.
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