Chipotle Mexican Grill, Inc. (CMG) & Green Mountain Coffee Roasters Inc. (GMCR): Einhorn’s Old Shorts Might Be Buys

There is nothing constant but change. Investors need to be on their toes at all times to check if the business environment and strategies of the companies in which they have invested is changing. This is even more applicable to short positions compared to long positions. If a short seller has sold a stock, he must be counting on something going wrong with the company. If the company’s management feels the same way, they are likely to take corrective measures that can change the entire short thesis. There also exists a possibility that the short seller was too bearish and might have painted a doomsday scenario that is unlikely to play out. Although sometimes high-profile short sellers are able to move the market with their impressive presentations, the fundamentals always prevail in the long run. In this article, I am discussing two stocks targeted by famed short seller David Einhorn that have turned the corner and are seeing upward momentum over past few months.

Chipotle Mexican Grill, Inc. (NYSE:CMG)

Last year, Einhorn suggested going short on Chipotle Mexican Grill, Inc. (NYSE:CMG) at the Value Investing Conference held in October 2012. The stock hit a low of $234 in that month and has been recovering ever since. Einhorn’s main argument for shorting Chipotle Mexican Grill, Inc. (NYSE:CMG) was increasing competition from Yum! Brands, Inc. (NYSE:YUM) owned Taco Bell. Taco Bell’s continued launch of new offerings like the “Cantina Bell” menu was perceived as a threat by Einhorn. However, many fund managers don’t believe this comparison is justified. According to Damon Vickers, the chief investment officer of Damon Vickers & Co, Taco Bell is solely a fast-food restaurant while Chipotle Mexican Grill, Inc. (NYSE:CMG) offers healthy fast food. Seems like other investors agree with Vickers and Chipotle’s share price has continued to rise after making a bottom in October last year.

Going Forward, I believe Chipotle Mexican Grill, Inc. (NYSE:CMG)’s share price is likely headed upwards. Increased marketing spending and nationwide roll out of catering services are likely to drive the company’s same store sales for the next few years and allay some of the concerns on slowing growth. The company’s stock is trading at 29 times forward earnings. However, I believe a premium valuation is warranted given the company is one of the best EPS growth stories in the restaurant space.

Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR)

Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) was one of the most high-profile shorts of David Einhorn. Einhorn trashed Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) stock at the Value Investing Conference in October 2011. The company’s stock price plummeted from $100 plus levels in 2011 to a low of $17 in July, 2012. The stock has recovered since then and is currently trading at $57.35. Einhorn painted “the world is coming to an end picture” for GMCR post its patent expiry in September 2012. This didn’t quite work out and the company continues to post impressive results. Einhorn calculated GMCR’s peak long-term earnings potential to be $3.50 (Slide 66 of his presentation). If we go by consensus estimates, the company is likely to post an EPS of $3.23 in the next year. In all likelihood the company will pass Einhorn’s peak long-term earnings estimates by fiscal year (Sep) 2015.

I believe Einhorn overestimated the increased competitive pressure post the K-cups patent expiry for Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR). GMCR is currently trading at 17.76 times forward earnings, which is significantly lower than what it used to trade in 2011. I see a continued upside in the stock.

Bonus: In addition to the above two stocks, Einhorn also has been bearish on St. Joe Company in the past. The stock is one of the top picks of Fairholme Capital’s Bruce Berkowitz. The company is into real estate and has significant exposure towards Florida. Although Einhorn’s short thesis made a lot of sense when the housing market was going down, things seems to be turning the corner for St. Joe recently with the housing recovery gaining traction and land prices firming up. We are still in the early phases of a housing recovery and it doesn’t make sense to be short this stock at these times.

To sum up, Chipotle’s increased marketing spending and roll out of catering services is likely to drive its Same-Store-Sales growth in the near future. Moreover, the competitive threat from Taco Bell is overblown as Chipotle Mexican Grill, Inc. (NYSE:CMG) offers organic and healthy fast food, while Taco Bell simply caters to the fast food segment. GMCR’s recent results prove that it can maintain market share and continue its growth despite the recent K-cup expiry. In addition to these two stocks one can also consider St. Joe Company as a potential bet on a recovery in land prices.

Ash Sharma has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Green Mountain Coffee Roasters. The Motley Fool owns shares of Chipotle Mexican Grill.