The Shorts Of Whitney Tilson’s Investor Letter: Nokia Corporation (ADR) (NOK) and More

After looking over hedge fund manager Whitney Tilson’s investor letter, I analyzed his top ten long positions, and now it’s time to look at the short side of his portfolio. Tilson took over as the sole manager of his hedge fund in mid-2012, vowing to return to a more ‘well-researched’ and concentrated portfolio (check out Tilson’s entire portfolio). Tilson said this about his plans…”I am pleased with the fund’s concentrated yet well-diversified long portfolio, which I believe will substantially outperform the market over time.”

Two of Tilson’s big short positions that he recently covered include Caterpillar Inc. (NYSE:CAT) and Chipotle Mexican Grill, Inc. (NYSE:CMG). While I think a short on Caterpillar is a poor idea (see why I think CAT is a good investment), there might still be some value in shorting Chipotle.

Last month Caterpillar posted EPS of $1.04, compared to the $2.32 for the same quarter last year; this came on a 7% drop in revenue year-over-year. The big miss was due to a previously announced goodwill impairment charge $0.87 per share. Despite this, the stock has showed resilience and is up 6% year to date. Billionaires Bill Gates and Louis Bacon both took new positions in Caterpillar during the third quarter (see Gates’ newest picks).

What will drive the equipment maker higher should be growing demand in emerging markets, as well as urbanization of under-developed countries. Caterpillar also appears to be quite cheap. The price to earnings-to-growth ratio for the stock is around 0.7, which is well below its major peers:

• Caterpillar 0.7x
• Deere 1.2x
• Cummins 1.2x
• GE 1.4x
• Joy Global 1.5x

As far as Chipotle goes, the stock saw same-store sales gain of 5% during the third quarter based on traffic growth of 4%. On the other hand, same store sales growth dropped 650 basis points on a year-over-year basis. Furthermore, same store sales growth is expected to further flatten in 2013, posting flat to low-single digit growth for the year.

When thinking about Chipotle, one of the best comps is other high growth-fresh food company Panera Bread.  Chipotle currently trades at 31.5x its 2013 earnings estimate, a premium of 55% to its peers, and well above other notable peer Panera. As well, the food company trades rich on a number of other multiples:

Chipotle: EV/EBITDA 21x, P/E 36x, P/CF 33x

Panera: EV/EBITDA 15x, P/E 28x, P/CF 22x

Three of Tilson’s four largest current short positions include InterOil Corporation (USA) (NYSE:IOC), K12 Inc. (NYSE:LRN) and Nokia Corporation (ADR) (NYSE:NOK). Tilson started touting InterOil as a short back in 2010, where he said that he has never had more conviction, and put the stock as his largest bearish position. Tilson notes that after more than a decade of drilling, InterOil has “no proven or even probable reserves, just a lot of hype.” Ari Levy of Lakeview Investment Group also has InterOil has a high conviction short (read more about the IFK presentation). Levy believes InterOil made misstatements to investors and agrees the company has no reserves.