A hedge fund manager who identified one of the best short ideas in 2011 responded to my open-ended request for fresh perspective in early March 2012:
I think there are more negative trends than positive ones, as far as I can see. For instance, a lot of companies will struggle in a hi gas environment. Refiners, restaurants, and some select retailers will suffer.
But as Stock Croc so aptly complains -- while Chipotle is "fundamentally sound" -- it is nonetheless overvalued. I would immediately add that it's vulnerable to gas prices along its supply chain.
So, in the great bull market of 2012, why not buy a bit of insurance should oil conflicts spill panic across the 2011 border? While money has been moving to equities, we're not exactly out of the macro frying pan. And what better fixing on this than an unapologetically optimistic growth premium in the restaurant space?
With over 1,230 restaurants and sites set on international expansion - 2012 efforts have the stock pushing new 52-week highs with a cadence akin to celebrity couples filing for divorce. In fact, Chipotle has touched 37 new record highs so far this year, the most in the S&P 500.
Asymmetric short opportunities often arise in the context of popular momentum. It's like buying unpopular stocks, except it's the opposite. I know, I'm blowing your mind here.
A Hard Landing From A Slowed Takeoff:
The liftoff assumed by Chipotle's multiple requires acceleration. Any slowdown in earnings growth will drag shares downward. But in 2012, the aerodynamics of food margins are subject to winds of change. As Jiang Zhang recently opined, Chipotle is "priced to perfection" and vulnerable to oil prices:
Note that the food price index is highly correlated with oil prices, thus rising food prices will likely follow suit with rising oil prices.
So we're in 2012 now-- we're Risk On; but if you want an asymmetric insurance policy, consider assembling a short position in CMG. That is, unless you think the positive trends outweigh the negative ones.