Chipotle Mexican Grill, Inc. (CMG), Herbalife Ltd. (HLF): A Monumental Lesson in the Merits of Foolish Investing

Recently, there have been a lot of headlines revolving around some big names in the investing world. Carl Icahn and Bill Ackman have been going toe-to-toe on trying to figure out whether Herbalife Ltd. (NYSE:HLF) is in fact a pyramid scheme. And now George Soros is throwing his name in the hat as well, trying to exert his sway on the company’s story. Meanwhile, Herbalife’s stock price continues its roller-coaster ride.

Who’s right? Who knows, really? It’s worth noting that Herbalife Ltd. (NYSE:HLF) has grown sales at a better than 13% annualized clip over the last five years while at the same time bringing the share count down by 16%. All of these headlines, though, got me thinking back to David Einhorn’s famous short call on Chipotle Mexican Grill, Inc. (NYSE:CMG) back in October 2012 and why there was just no way I could rationalize jumping on that bandwagon. Let’s take a look back at what has happened.

Oct. 2, 2012
Word got out that David Einhorn revealed his Chipotle Mexican Grill, Inc. (NYSE:CMG) short thesis at the Value Investing Congress. The basic gist was that Chipotle would be facing some serious competition from the likes of Yum! Brands, Inc. (NYSE:YUM)‘ Taco Bell and its new Cantina Bell menu. On this day the stock opened at $319.87 and reached a low of $290.15 before closing at $302.96, down more than 5%. I started talking to my boss, Fool co-founder Tom Gardner, about Chipotle being a business with many of the qualities he looks for in his Everlasting Portfolio in Motley Fool One.

Oct. 18, 2012
Facing expectations of a less-than-stellar quarter, Chipotle Mexican Grill, Inc. (NYSE:CMG) released its results for the third quarter. The following day, more sellers piled on and Chipotle shares fell another 15%, closing at $243. I ratcheted up my case for Chipotle’s long-term prospects with Tom, looking at the situation as a potentially opportunistic time to add Chipotle Mexican Grill, Inc. (NYSE:CMG) to the latest Everlasting Portfolio picks coming out on Dec. 2. We both saw two distinctly different companies. Considering Chipotle’s food costs ring in at about 33% of sales versus Yum! Brands, Inc. (NYSE:YUM)‘ 28%, we saw Chipotle as striving to offer a far different product with a priority on ingredients. Chipotle’s mission of “Food With Integrity” spoke volumes to us both.

Dec. 2, 2012
After much deliberation and research, Tom added Chipotle Mexican Grill, Inc. (NYSE:CMG) to the Everlasting Portfolio during a time of general pessimism regarding the stock. The cost basis: $264.80. While the stock was off its recent lows, and with an earnings multiple creeping below 30, we both noted that the last time we had seen Chipotle at such a valuation in relation to its earnings multiple was in the first half of 2009, when the company witnessed a similar time of very low same-store sales and questions regarding its growth prospects. We didn’t think it would last.