Is Einhorn Out to Lunch on This?

The latest short idea from billionaire hedge fund manager David Einhorn, Chipotle (CMG), was met with nearly immediate market gratification. The stock has lost 7% since Einhorn's presentation, and the intraday price graph from that day screams, "You've been Einhorned!" At the value Investing Conference in New York, Einhorn's major contention for the stock was this: Taco Bell, one of the restaurant chains owned by Yum! Brands (YUM), has introduced new products, such as the Cantina Bell rice bowls, that directly compete with Chipotle's central business. This, along with the stock's overvalued price, are what make Chipotle a short candidate.

We have recently indicated that Chipotle is not an attractive buy candidate on a quantitative basis. The company's shares are priced at around 27x forward earnings, a higher multiple than Yum! Brands' forward P/E ratio of 18x. In fact, Chipotle looks more expensive than Yum! Brands based on a number of different valuation ratios. Einhorn noted that "reception for Cantina Bell has been mostly positive . . . and Chipotle is at risk of losing its frequent customers," thereby making the growth-centered company more of a valuation bubble....465 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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