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Author: newsreporter Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 428  
Subject: Einhorn effect Date: 10/8/2012 1:18 PM
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Chipotle Gets Einhorned: Why David Einhorn's Thesis Is Flawed
http://seekingalpha.com/article/901961-chipotle-gets-einhorn...


When David Einhorn speaks, Wall Street listens. The reason is simple: Einhorn is right much more often than he is wrong. That is why shares of Chipotle (CMG) dropped over 4% on October 2, as Einhorn laid out his short thesis against the restaurant chain. For many investors, the thought of being on the other side of David Einhorn is enough to cause them to hit the sell "button." However, we believe that this time, the outcome may be different. Chipotle shares several differences with Einhorn's most successful shorts, and the thesis itself is, in our view, lacking in concrete detail. In this article, we will explore Einhorn's thesis against Chipotle, his track record, and why we believe that this time, the outcome may be different. For purposes of disclosure, we hold shares of Chipotle.

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Einhorn's thesis against Chipotle was presented at this year's Value Investing Congress, an annual gathering of Wall Street's top investors. Einhorn's short thesis touched on several points, but the core of his thesis was that Taco Bell's (YUM) new Cantina Bell menu will spell trouble for Chipotle as it steals customers and market share. Einhorn stated that he conducted a survey of Chipotle's customers, and found that 75% of them frequent Taco Bell, which he argues is a material issue for Chipotle. While the issue of Taco Bell's attempt to enter this market forms the core of Einhorn's short thesis, he also discusses the company's valuation, rising input costs, and regulatory issues (which we will touch upon later on).

With the stock off over 4% on the back of Einhorn's criticisms, it is clear that the market is paying attention due to Einhorn's track record. And that is the first point that we believe needs to be addressed. We freely admit that more often than not, David Einhorn is, in the end, correct in his short bets. But, his best-known, and most profitable (at least for him and Greenlight Capital) are ones that fall into a specific category, and we address this below.

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In arguing that Chipotle is a short, Einhorn laid out several points: the threat of commodity costs, labor issues, Cantina Bell, and the company's valuation.

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We believe that this drop in Chipotle stock presents a buying opportunity. David Einhorn is, without a doubt, one of the most successful investors of this generation. But no investor can have a perfect track record. And we believe that when it comes to Chipotle, Einhorn has made a mistake. The company is in solid financial shape and is still growing despite some headwinds. We look forward to Chipotle's Q3 earnings to see how the company is dealing with commodity and labor issues, as well as what kind of impact Cantina Bell has had. But, based on the information available in the market today, we believe that Chipotle will overcome the issues that David Einhorn has raised, and think that Chipotle's best days are ahead of it.
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