Stock Picking with Einhorn

Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When an All-Star fund manager targets one of your stocks as a potential opportunity for a short, what do you do? When the discussion includes jokes people actually laugh at, and a Spielberg-inspired Power Point presentation, what should our initial reaction be? Should we even have one at all? Do we treat these people like E.F. Hutton and throw the investment off a bridge the first chance we get? The founder and president of Greenlight Capital, David Einhorn, had that effect Tuesday at the Value Investing Congress, before a packed house of investing stars.

Let me clearly state that I have an enormous amount of respect and admiration for Mr. Einhorn. His words do carry a great deal of weight; albeit, as he pointed out himself, they can be somewhat obese and over-reactionary at times. But one thing he made abundantly clear: do your own homework.

The initial, knee-jerk reaction to his talk was to dump shares of Chipotle Mexican Grill (NYSE: CMG), based solely on his homework, sending shares sharply lower in a matter of minutes, before hitting an intraday low a few nickels above $290 a share. Anyone that wanted a quick spot to make a few bucks with Chipotle had their opportunity, as shares were back above $300 only a day later (currently around $295 as I type this).

I happen to agree with Mr. Einhorn on some of the points and concerns he raised with Chipotle, but his own personal “survey” of Taco Bell customers (he claims over 4,000) has me scratching the thin hairs atop my skeptical head. For one, I question the lucidity of more than a few of those patrons, especially since a majority of the menu items at Taco Bell requires a substantial deadening of sober taste buds. Not to mention the patience of Job to receive these wrapped morsels of heartburn and indigestion in a somewhat timely fashion.

Rather than venture down a slippery slope of clientele differences between the two restaurants, let’s just agree that scant few loyal Chipotle regulars subject themselves to a “fourth meal.” I do not own stock in either Chipotle or Yum! Brands (NYSE: YUM), which somehow coaxed Chef Lorena Garcia in their test kitchens to upgrade the Beavis and Butthead menu with offerings from the “Cantina Menu.”

Einhorn mentioned that he was not interested in Yum!, citing difficulties with the KFC side of its fast-casual restaurant business with the growth slowing in China. When you throw Pizza Hut into the mix, there’s really not much here to like other than the 2% dividend yield ($1.34 per share, annually).

What Einhorn did mention as a potential favorite idea is a stock I wrote about in my last post, Cigna (NYSE: CI), making note of the potential international growth at an envious 20% clip. The best part about the reactions of the Einhorn Fan Club is the ability for me to keep score. An extremely vital portion of homework should be devoted to performance, not only on our own, but that of our investing peers (or those we gaze upon from afar). This HMO favorite of Einhorn allows me to play a round of stock picking with one of the best in the business. As I stated in the previous post, I much prefer either the Health Care Select Sector SPDR (NYSEMKT: XLV), which is currently hitting new 52-week highs, or Ventas (NYSE: VTR), and both offer yields that laugh at Cigna each quarter, without the dramatic whipsaw share price potential pending the upcoming election.

We’re going to get early indicators as the next round of earnings quickly approaches. Yum! is up first, reporting Tuesday, Oct. 9, with Chipotle on tap the following week, Thursday, Oct.18. For investors of either, these will definitely be worthy of your time, especially considering Einhorn’s record with shorts.

We hear from Ventas Oct. 26, with Cigna calling in Nov. 1. The guidance will probably provoke share price reaction more than top-line and/or bottom-line beats (or misses). Einhorn has the early lead, with Cigna up 5% since my post, but maybe someday my stock mentions will give holdings like Ventas more than a 1% boost in the same time span.


kmet312 has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill. Motley Fool newsletter services recommend Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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