Courtesy of Josh Brown (@ReformedBroker), who is attending a conference where hedge fund titan Jeffrey Gundlach is speaking, his latest idea is to short Chipotle Mexican Grill. Recall that David Einhorn also has proffered a bearish thesis on CMG, basically arguing that Taco Bell will (quite literally) eat its lunch with innovation and lower price points.
According to Josh, part of Gundlach’s reasoning for the short is that “there is no such thing as a gourmet burrito.” While I am sure Gundlach was being a bit facetious in the comment, let’s reexamine the weekly chart to see if the short idea holds any water.
Clearly, CMG had a great momentum run from the bottom of the last bear market through April 2012.
It has now been a full year since it peaked, though, and the stock remains at a critical juncture. Since last November 2012, the stock has seen a slow and steady grind higher, undoubtedly frustrating shorts. But now the big test comes up against the declining 50-period weekly moving average (blue line). Bears likely need to prevent a breakout above $350, or a run at the old highs becomes a distinct possibility.
Bulls will argue that pattern over the past year amounts to an inverse head and shoulders bottom, but it is quite sloppy and likely needs more work even if true, meaning a slight pullback here to form a higher low before the breakout would be most bullish. On the downside, shorts would be wise to press for a break below $306.
The main point is that after a full year of correcting its steep run from 2009-spring 2012, Chipotle found initial resistance at the $350 area, and is largely still in a corrective pattern. Whether it goes the way that DECK GMCR and NFLX did last year, as Einhorn and Gundlach believe, should be revealed sooner than later.
Earnings are scheduled for 04/18.
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taco bell and chipotle don’t compete for the same customers – the brand is different –
Anecdotally, I agree. Chipolte is for aspiring lower class and routine middle class dining. Taco Bell is lower class everyday fast food. Chick fil A is the same as Chipolte for the lower class- fancy “good eating” for that demographic.
Of course my view has nothing to do with stock price action, just my two cents…