Published October 02, 2012
NEW YORK – Shares of Chipotle Mexican Grill Inc took a nosedive on Tuesday when hedge fund manager David Einhorn said the restaurant chain will face significant competition and additional costs, making it an attractive "short."
In a presentation at the annual Value Investing Congress in New York, Einhorn highlighted some stocks he expects will rise such as General Motors, but devoted much of 120-slide presentation to devouring national chain Chipotle.
Einhorn, who runs $7.7 billion fund Greenlight Capital, used the same conference last year to recommend investors avoid bullish positions in Green Mountain Coffee Roasters. That stock slid after his remarks, and remains down more than 70 percent.
This year, he said competition from "a resurgent Taco Bell," owned by Yum Brands, is a major problem for Chipotle, due to Taco Bell's cheaper menu and its roll-out of new and popular food selections.
Chipotle's stock sank at least 6.5 percent to $295.68 after Einhorn concluded his remarks, then regained some footing. At midday it was trading at $297.32, down 5.95 percent.
In addition to rising foods costs, he said, Chipotle will have to offer health insurance coverage to its employees under new insurance laws that are part of the Obamacare legislation. And he noted that the company's issues with undocumented workers have attracted the interest of the U.S. government.
Hedge fund managers, unlike mutual fund managers, can bet against a stock price by "going short" or borrowing the stock and hoping to repay the loan later for less.
Einhorn also reiterated his critique of Green Mountain Coffee Roasters, saying the company has "poor spending discipline" and faces a slew of competition now that patents on some its most popular products expired weeks ago.
Einhorn was not all bearish though, and devoted some time to praising his "favorite HMO" Cigna Corp and General Motors.
He said he likes Cigna because its success is not tied to macroeconomic events, such as solving Greece's debt crisis, and that the effects of implementing President Obama's health care plan should be minimal.
Meanwhile, Einhorn said auto-maker General Motors "is much healthier now," adding that the carmaker is getting its product refreshments "right."
Einhorn, who is one of the $2 trillion hedge fund industry's best known managers, is no stranger to this value investing conference where he was one of the event's biggest drawcards. In 2007 he discussed issues at Lehman Brothers, one year before its bankruptcy.
This year, he began his presentation by saying he will not be offering a thesis about Herbalife on Tuesday.
Earlier this year Einhorn asked a few questions on a Herbalife earnings call and his mere appearance on the conference call sent the shares tumbling.
He said his trading often sparks wild speculation, and every investor needs to do his or her own homework before investing in a stock.
Known for his strong returns plus an ability to move stocks, Einhorn's Greenlight fund was up 13.5 percent through the end of September. This year, the average hedge fund is delivering only low single digit gains, industry analysts have said. Since Greenlight launched in 1996, Einhorn has treated investors to average annual returns of 20 percent.
(Reporting By Svea Herbst-Bayliss; Editing by Gerald E. McCormick)