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David Einhorn Closes Chipotle Short After Losses

Stocks in this article: CMG GM

Updated from 9:01 a.m. ET with opening share prices and additional information throughout.

NEW YORK (TheStreet) - David Einhorn of Greenlight Capital won't be wasting away in burritoville any longer.

Einhorn has closed his short trade in Chipotle Mexican Grill (CMG) after a bet against the popular Mexican restaurant chain gave the hedge funder "gas." Greenlight appears to have lost significantly on its Chipotle short, after exiting the trade in the first quarter.

Greenlight Capital said in its first-quarter letter to investors it closed a short position in Chipotle shares at an average price of $417.56. Because Greenlight had bought shares at an average price of $320.29, the fund calculates its internal rate of return (IRR) was a loss of 33%.

"This short gave us gas," Einhorn said in the letter. Chipotle shares opened Wednesday trading at $508 a share.

The closing of the trade comes about 18-months after Einhorn first disclosed a bearish view of Chipotle at the Value Investing Congress in October 2012. At the time, Einhorn said that Chipotle might suffer from increasing competition, slowing comparable store growth and cost pressures.

At the October 2012 investor conference, Einhorn famously cited Taco Ball's Cantina menu as a particular risk for Chipotle leading many in the business media to conduct taste tests. Generally, the consensus was that Einhorn's numbers were compelling, however, his gastronome may have been misguided.

After a few disappointing quarters that gave credence to Einhorn's views, Chipotle was able to revive growth and use a heavy slate of store openings to grow the company's sales and earnings. Within a year of Einhorn's short, Chipotle shares had recovered, rising above $400 a share.

From October 2013 through the first quarter of 2014, Chipotle's strong stock price performance continues, with shares rising as high as $622.90.

As of February, Einhorn continued to press his short trade and views that the restaurant chain would see its performance tail off. Chipotle was Greenlight's worst-performing short in the fourth quarter of 2013.

In April, Chipotle said it would raise its menu prices after mixed first quarter results that included a significant drop in the company's operating margins.

Chipotle's first-quarter net income rose 8.5% to $83.1 million, or $2.64 a share, missing analysts' estimates by 22 cents, according to Thomson Reuters. Revenue rose 24.4% to $904.2 million, beating the average estimate of $874 million.

Comparable restaurant sales at Chipotle rose 13.4% in the March-ending quarter, compared to estimates of 8.8%, as tallied by Consensus Metrix. Restaurant level operating margins fell 40 basis points to 25.9% during the quarter, from higher food costs.

Closing Positions, Opening New Shorts

Greenlight also said in its first quarter investor letter the hedge fund had closed a long investment in automaker General Motors (GM) early in 2014 after a weak full-year guidance from the company. That investment netted a 25% IRR.

A position in Delphi (DLPH), an auto parts supplier, was closed at an even higher 47% IRR after the company's management "proved to be good stewards of excess capital, and the stock was re-rated as we had hoped," Greenligght said.

Other longs closed by Greenlighd included DST Systems (DST), Merck (MRK) and NCR (NCR), all at high IRR's. Shorts closed at a loss included Fortescue Metals, Lowblaw Companies (L) and Michael Kors (KORS), all at above 20% negative IRR's.

Greenlight capital returned a loss of 1.5% net of fees in the first quarter. "Our longs were modestly profitable, our shorts lost a bit more than we made on our longs, and macro lost a little," Einhorn said.

To much fanfare, Einhorn also said Greenlight had begun to short "cool kid" technology stocks given a the fund's view that a bubble is emerging. "In our view the current bubble is an echo of the previous tech bubble, but with fewer large capitalization stocks and much less public enthusiasm."

Of note, Einhorn criticized the tech sector's stock compensation and Wall Street analyst's exclusion of that expense from their analysis. He also questioned novel valuation metrics such as "eyeballs," "total addressable market" and price-to-sales ratios.

"Given the enormous stock price volatility, we decided to short a basket of bubble stocks," Einhorn said, further explaining that basket may be less risky than single stock shorts.

-- Written by Antoine Gara in New York.

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