When Brad Lamensdorf talks about Chipotle (CMG), the company, he'll discuss how management has gotten much right. When he talks about Chipotle, the stock, that's another matter.
On the stock, he's not at all positive, not at its current levels. As a result, an ETF he manages, the AdvisorShares Ranger Equity Bear, (HDGE) has a short position in the Denver-based burrito maker. Doing so worked out previously for the fund back in the spring of 2012, when the stock was around $365. Shares of Chipotle stumbled on earnings worries, and Lamensdorf covered with the stock at about $300.
Since then, betting against Chipotle has been a money-loser for the most part. The shares did fall 11.9% that year, but in 2013 rose 79.1% and in 2014 another 28.5%, according to FactSet. Lately, Lamensdorf grew interested again, shorting the stock at $672.
"There's no question that [Chipotle] did a fantastic job" operating since its setback of a couple of years ago, he says. "They did a lot of very good management-oriented things to solve problems and to continue to bring in revenue. Our feeling has been that, while they've done a great job, the stock is completely priced for perfection."
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Chipotle, at about $665, trades at 47 times last year's earnings. Lamensdorf believes a multiple of 25 to 30 times earnings would be more appropriate -- at 30 times, the stock would trade for $424, or a 37% drop from today. His view is that the prices momentum traders have been paying on the way up has created a massive gulf from where investors with the "growth at a reasonable price" philosophy would buy. Because of what he sees as the size of this difference, if the outstanding sales and earnings growth Chipotle has seen slows even modestly, he believes it could be quite a fall before buyers appear in large numbers.
"Management is doing a very good job, and they definitely plugged a lot of holes that we saw," he says. "Expectations are just running way ahead of where we think the stock should be. It's an example of a great company and a dangerous stock."
For the majority of its history, Chipotle has been an indisputable smash with diners and investors. It has developed into the restaurant many restaurants want to be -- Wall Street and the business media regularly research potential "next Chipotles." With each quarterly financial report since late 2010, Chipotle has averaged year-over-year revenue and earnings growth well above 20%. Same-store sales have had three consecutive double-digit quarterly increases, including a 16.1% gain in the fourth quarter. It's making progress toward changing how we view fast food and how its competitors operate. Earlier this month, McDonald's (MCD), which used to own a controlling interest in Chipotle, said it would begin selling chicken without certain antibiotics.