Chipotle Mexican Grill, Inc. (CMG): Jeff Gundlach Is Incorrect About This

David Einhorn’s Chipotle bear case

Greenlight Capital’s David Einhorn made a similar case against Chipotle last October, with one exception. Einhorn didn’t cite taco trucks — he saw Chipotle facing pressure from Yum! Brands, Inc. (NYSE:YUM)’ Taco Bell.

Taco Bell has been a great part of Yum! Brands, Inc. (NYSE:YUM)’ business in recent months, particularly as its KFC brand continues to face headwinds in China. The Doritos Locos taco proved to be a smash hit, and might have lead to the creation of 15,000 jobs.

But therein lies Taco Bell’s problem when it comes to challenging Chipotle Mexican Grill, Inc. (NYSE:CMG). Although Taco Bell has pushed its Cantina Bell Menu (a collection of higher quality offerings marketed almost directly at Chipotle’s customers) its continued focus on the low end of the market ensures that it will never attain the same image as Chipotle.

In fact, earlier this month, Taco Bell said it would expand the $1 section of its menu. While that might help the fast food giant, it won’t win it any favors with the Chipotle crowd. A key part of Chipotle’s branding efforts has been the promise of “food with integrity” — locally sourced, organic whenever possible.

Like McDonald’s Corporation (NYSE:MCD) inability to challenge Starbucks Corporation (NASDAQ:SBUX) with its McCafe beverages, Taco Bell will never challenge Chipotle as long as it sticks to its classic, lowest-common-denominator image.

Investing in Chipotle?

So should investors put money to work in Chipotle Mexican Grill, Inc. (NYSE:CMG)? Maybe not. As Gundlach notes, the stock does seem to be a bit pricey, and its chart could be a bearish sign for those who subscribe to technical analysis.

However, shorting Chipotle based on Gundlach’s argument seems to be equally as dubious. Although expensive, stocks can always become more expensive. At the same time, competitive threats seem to be based more on theory than in reality.

The article Why Jeff Gundlach Is Wrong About Chipotle originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.

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