Einhorn's Chipotle Short Starved for Logic: Street Whispers

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 an onslaught of 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's 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 (GMCR) and laid out why he is bullish on the earnings prospects of General Motors (GM) and Cigna (CI), in spite of political and regulatory uncertainty that hangs over both stocks.

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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-- Written by Antoine Gara in New York

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