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Einhorn's Chipotle Short Starved for Logic: Street Whispers

I followed Einhorn's advice, locating a dreary Taco Bell in New York's Penn Station, and suffice to say Taco Bell's Cantina Bowls are no burrito bowls.

When making his presentation, Einhorn trotted out a survey conducted by Greenlight on roughly four thousand Chipotle and Taco Bell customers to see how both chains stacked up.

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According to Einhorn, a majority saw little distinction between the two chains, in spite of big pricing differences. As Taco Bell rolls out its "Cantina" line of healthy Mexican food dishes, Einhorn says his short position is predicated on the company winning over price conscious Chipotle customers.

More likely is that the short will pay off for the simple reason that the interplay between Chiplotle's earnings multiple and its growth outlook had the stock overvalued heading into the fall.

At PE multiples in excess of 30, other fast-growing food and drinks chains have seen shares fall from record highs as earnings come in slightly below expectation. Notably, Starbucks (NASDAQ:SBUX) shares have lost over 20% since the company missed earnings slightly and the stock retreated from a PE above 30.

On Friday, Wedbush Securities analyst Nick Setyan downgraded Chipotle from outperform and cut the company's price target to $270 from $350, citing the company's weaker-than-expected same store sales growth below 5% an its reluctance to spend on marketing that would drive customer traffic.

"We no longer expect increased marketing to drive incremental SSS growth ahead of expectations, and have lower confidence in another near-term price increase," wrote Setyan, in a Friday note to clients. Setyan underscored growth concerns and a cloudy commodity price outlook, but saw little evidence of the company's diminished standing as a healthy and popular fast food chain.

"Although we continue to believe Chipotle's pricing power remains intact, we have decreased confidence in another price increase to offset inflationary headwinds," wrote Setyan.

Commodity price headwinds, a maturing growth profile, and weak marketing spending are different than earnings wrecking competition.

Meanwhile, instead of picking on companies with flaws in their business model -- as Einhorn did when rolling out a short trade in Green Mountain at this time last year -- the short seller simply appears to be picking on stocks that have run too far, too fast relative to earnings. Einhorn's Green Mountain short was as much about competition and poor cash flow dynamics, as it was about a highly critical view of the company's accounting and management practices.

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.

In fact, there are some big risks to the trade, namely that increased marketing spending may yet restore 5% same store sales growth. Meanwhile, the company has recently opened an Asian-themed ShopHouse restaurant brand that may revive earnings and open up new growth opportunities.

After taking on companies like Allied Capital in previous short trades, Einhorn wrote a groundbreaking exposition called Fooling Some of the People All of the Time on how to identify overvalued companies overrun by poor disclosure or an eroding market standing. In the case of Chipotle, it's Einhorn who may now be trying to play the fool's game.

At the Congress, Einhorn reiterated the short case for Green Mountain Coffee Roasters and laid out why he is bullish on the earnings prospects of General Motors (NYSE:GM) and Cigna (NYSE:CI), in spite of political and regulatory uncertainty that hangs over both stocks.

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