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TheStreet Open House

Gundlach Poised to Join Einhorn's Chipotle Short

NEW YORK ( TheStreet) - Jeff Gundlach, head of investment manager Doubleline Capital is poised to join David Einhorn of Greenlight Capital in shorting the shares of Chipotle Mexican Grill (CMG), according to a Thursday presentation.

At a luncheon at the New York Yacht Club on Thursday, Gundlach indicated he will present Chipotle as a short trade at the upcoming Ira Sohn Conference in May.

"Gourmet Burrito is an oxymoron," Gundlach said on Thursday referring to Chipotle, according to TheStreet contributor Joshua Brown, who is attending the presentation. Gundlach is saving a full presentation on why he is shorting Chipotle shares for the upcoming Ira Sohn conference, scheduled for early May, Brown writes on Twitter.

The conference is among the most popular for value investors and short sellers to present new investment ideas.

Chipotle shares fell over 2% to $335.85 in Thursday afternoon trading, falling about 1% after Brown disseminated Gundlach's comments on Twitter.

Last year, David Einhorn surprised investors at the Ira Sohn Conference by detailing a short position in Martin Marietta (MLM) shares.

Many had speculated the hedge fund manager would present on Herbalife (HLF), the now embattled supplements seller that is working to ward off a $1 billion short position taken by Bill Ackman of Pershing Square Capital Management.

In October, Einhorn detailed why he is shorting Chipotle shares at the Value Investing Congress, another prominent investor conference, on the belief it is a run-on-the-mill fast food chain with little brand premium the eyes of consumers.

Einhorn expects margins and growth at the company will fall amid competition from price competitors such as Taco Bell, owned by Yum! Brands (YUM) and Qdoba Mexican Grill.

"In presenting our short thesis on Chipotle , we noted that the stock trades at a premium multiple but faces significant headwinds including rising food costs, higher healthcare costs related to Obamacare, and competition from a resurgent Taco Bell," Einhorn wrote in a 2012 investor letter, which cited a Greenlight Capital survey indicating Taco Bell's Cantina menu could draw Chipotle customers.

Einhorn is also presenting at the Ira Sohn conference in May, however, he hasn't yet indicated what he will be speaking about.

Chipotle continues to point to consistent earnings growth and rising store profitability as clear evidence the company has a premium product.

Meanwhile shares of Chipotle Mexican Grill have quietly regained the ground lost since Einhorn's presentation on Oct. 2.

The company's shares are up over 15% this year, outperforming the S&P 500 Index. Chipotle recently breached a $319.87 share price prior to Einhorn's presentation, indicating the stock may have already bottomed amid already apparent earnings headwinds and negative publicity.

Upcoming earnings will provide insight into how the Denver-based restaurant chain's stock will perform in 2013.

Chipotle faces a high bar on year-over-year earnings and same-store comparisons and pressure on margins from commodity price inflation, but if the company can prove to investors that it still has high growth prospects, the short trades could eventually unravel.

Still, with the stock trading at forward multiples of about 30 times earnings and a short interest of roughly 13%, Chipotle investors remain vulnerable to disappointments such as the company's third quarter earnings, which sent the company tumbling to multi-year lows in October.

Chipotle's first quarter earnings report, scheduled for April 18, will likely foretell whether Einhorn or new prospective short sellers such as Gundlach can profit from earnings weakness.

Analysts forecast Chipotle will only grow EPS about 7% this quarter, indicating a sharp drop in profit growth, as revenue continues to hit new highs.

First-quarter consensus estimates stand at revenue of $724 million and a profit of $67 million, or $2.13 a share, according to Bloomberg data.

The quarter will also be about how 2013 guidance impacts investor concerns such as same store sales comparables, and commodity price inflation.

Chipotle has yet to fully detail how it may use a marketplace premium to raise prices and offset some earnings drains like high food costs, which represent about 30% of the company's expense.

-- Written by Antoine Gara in New York

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