Taco Hell for Chipotle Shorts

Ben Stein waxed poetic in Sunday's New York Times over the joys of Taco Bell's Taco Supreme. No arguments there, we are partial to them as well, soft or crunchy.

Speaking of tasty, shares of Chipotle have been jumping since the company's IPO at $22 a share. But the stock has not worked out well for all investors:

Bears sold short 3.6 million Chipotle shares as of Sept. 11, or 26 percent of those available for trading, according to New York Stock Exchange data. The bet lost money because the stock rose nine times more than the 2 percent gain in the Standard & Poor's 500 Index since then......Short sellers, who sell borrowed shares hoping to replace them with cheaper stock later, increased wagers the shares will fall after this year's 116 percent rally pushed Chipotle's price to 69 times estimated 2007 earnings. That's more than twice the average of restaurants in the S&P 500, including Oak Brook, Illinois-based McDonald's and Louisville, Kentucky-based Yum! Brands Inc., owner of Pizza Hut, Taco Bell and KFC. Bloomberg

Shorting on valuation alone can be a dicey prospect, and it has not worked out well for Chipotle skeptics up to this point. But if really you hate the stock, you finally have a shot here:

Analysts at Robert W. Baird & Co. cut their rating on Chipotle to ``neutral'' from ``outperform'' on Oct. 8, citing the stock's price relative to earnings growth, or PEG ratio. Chipotle's PEG ratio is 2.0, above the 1.6 mean for retailers such as Starbucks Corp, Home Depot Inc., Bed Bath & Beyond Inc. and Panera Bread Co. when they were growing the fastest, Baird analyst David Tarantino said.

``The PEG has reached a level that others have reached in the past, and generally those growth stories have been unable to hold,'' he said in an interview from Milwaukee.

``We felt the valuation was excessive,'' said van Leersum, whose fund bought its stake in November 2006. ``We got out at a price that we felt was a very attractive exit point.''

This story reminds me of Starbucks circa 1998. The shorts were making plenty of noise over the valuation and the absurdity of a $4 cup of coffee. But Schultz and Co. were far from saturating the country with locations. Chipotle might not turn out to be as iconic a brand as Starbucks, but with only 640 doors open around the country, there is a lot of low hanging fruit remaining.

The valuation is heady for sure, and a punk market takes no prisoners, but the shorts were a little too early to this one. Maybe by a few years.

Chipotle Burns Short Sellers on Outlook for Growth
Bloomberg

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