Gundlach Recommends Shorting Chipotle on Earnings Growth

Jeffrey Gundlach, manager of the top-ranked DoubleLine Total Return Bond Fund, reiterated his case for shorting Chipotle Mexican Grill Inc.

“I am not impressed with earnings growth,” Gundlach, chief executive officer of Los Angeles-based DoubleLine Capital LP, said today at the 2013 Sohn Investment Conference in New York. “I like CMG products, but gourmet burrito is an oxymoron,” he said, referring to Chipotle by its ticker symbol.

Chipotle, the Denver-based fast-casual dining chain with more than 1,450 locations, has been trying to attract customers and boost sales with more traditional advertising, catering services and new food, including Sofritas -- tofu with spices and roasted peppers. The company, led by co-Chief Executive Officers Steve Ells and Montgomery Moran, has said that it may raise menu prices later this year.

Chipotle fell 3.6 percent on April 11 when Gundlach first recommended shorting the stock, before rallying 11 percent since. Chipotle looked “vulnerable” after recent gains, Gundlach said at the time, without giving a price target. Gundlach, whose flagship mutual fund has beaten 99 percent of peers in the past three years, correctly predicted the subprime mortgage crisis in 2007 and told investors in 2012 to bet against Apple Inc. shares before they started falling.

In a short sale, an investor borrows a security and sells it, in anticipation that the price will fall and the security can be repurchased later at a lower cost.

Stock’s Rally

Chipotle’s stock increased 23 percent this year through today’s close of $366.33 in New York, compared with a gain of 14 percent for the Standard & Poor’s 500 Index. Net income in the first quarter increased 22 percent to $76.6 million, or $2.45 a share, from a year earlier, Chipotle said last month. Analysts estimated $2.13 a share, on average.

The stock carries a high price-earnings ratio, he said. Its P-E ratio is almost 40, according to data compiled by Bloomberg.

A former drummer in a rock band with a passion for art, Gundlach’s investment picks have included natural gas, gemstones and stocks. He made a recommendation to invest in natural gas in April 2012 after the Standard & Poor’s GSCI Natural Gas Index had fallen 59 percent since January 2009. Since then, the index has almost doubled.