This note was originally published at 8am on January 18, 2013 for Hedgeye subscribers.
“When torrential water tosses boulders, it is because of its momentum”
To invert is to change from one position, direction, or course to the opposite position, direction, or course. Within the context of yoga, the art of inversion includes using breathing and your core mussels to control the mind and the body; inversion allows for efficient brain stimulation.
Blockages of blood flow to the brain can sometimes result in cognitive difficulties or, in extreme cases, serious health issues. Performing daily inversions combats this by forcibly flushing old blood out of the brain and replacing it with freshly oxygenated, nutrient rich blood coming directly from the heart. Performing the ritual of Adho Mukha Vrksasana has been empowering and beneficial for me. The state of relaxation that follows can lead to gratifying periods of reflection.
Listening to restaurant companies present at the ICR XChange conference is another ritual than can lead to soul searching. “What am I doing?” “Does this matter?” “Did he really just say that customers love getting a free bucket of peanuts?”
After many years of attending the ICR XChange conference, I decided not to attend this year. As part of a new approach in 2013, I am trying to do things differently. Being a restaurant analyst that is not at the ICR conference is analogous to performing an inversion; in part, it represents the avoidance of group-think that can lead to poor investment ideas.
The truth is, the #OldWall process is broken and, other than secret one-on-one meetings with management, which I have no desire to attend, little-to-no incremental insight is available from listening to restaurant company executives at ICR this week. The ICR Exchange Conference is as #OldWallSt as it gets. All 21 sponsors of the 15th Annual ICR XChange are the biggest investment banks on Wall Street. Before each presentation, an industry analyst takes the podium to say a few kind words about the presenting company and its future prospects. There are countless intelligent people to learn from at the event but, at its core, it represents the inherent conflict of interest that typifies the traditional sell-side research model from Wall Street.
Listening from afar, I am realizing that I have made the correct decision. Listening to endless generic presentations, getting to Chipotle’s “break out” table 30 minutes early just to get a seat, knowing in advance that commentary will be uniformly bullish whatever the underlying reality, becomes a meaningless exercise eventually. After yesterday’s preannounced EPS miss from Chipotle, anyone could have written the script for today’s conference: “Everything is fine, we are still changing the industry, and our growth opportunity is still as great as ever. This EPS miss was merely a blip”. The bar scene in Miami definitely had a Wall Street influence last night. A lot of conviction can be gathered on an idea while having a few drinks.
The “read through” and “takeaway” from a company meeting at ICR is often meaningless. We are getting passed a lot of notes from the sell-side stating that “our meeting with management gives us confidence” in our buy rating. If you ever receive a note from ICR saying that management meetings have bolstered confidence in a short thesis, call me collect.
That’s the problem with the #OldWall, it is very difficult to speak one’s mind about a company. As an analyst, your incentives should line up with your clients’: produce effective research on the value of the securities in question and assist those paying clients in making their stock selections. Unfortunately, the incentives of an analyst are too often in conflict with the clients. Getting paid and retained is what matters; if clients happen to do well, that’s a happy coincidence. Ask yourself how your sources, and their firms, get paid.
Coming out of events like ICR, the momentum in certain stocks can build and get a lot of people paid in the short run. If there is one stock in the restaurant space that has embodied momentum over the past few years, it has been Chipotle. Today, management hinted at raising prices in 2H 2013 to absorb food inflation. Yesterday, the stock reacted very favorably to that news, we think, in error. The following is a checklist of questions that we think investors need to become comfortable with before getting behind this move in CMG:
- If they decide to take price, do they have pricing power?
- How much sensitivity is there?
- Is new unit volume growth coming back?
On December 12th, we wrote that the CMG bottoming process was likely to take several quarters and that we would be more constructive on the stock at $250. We know that over the past number of years, new unit AUV growth has led the inflection points in revenue growth, which has sequentially decelerated over the last two reported quarters. Until new unit AUV growth bottoms, we expect top line growth to remain sluggish.
The ICR XChange posed an opportunity for management to hint at taking price and, as usual, the congregation was more than willing in their acceptance of the myth. Chipotle has to operate, like everyone else, in the real world. CPI for Food Away from Home has rolled over and, with the share-of-stomach battle in casual dining heating up, there could be limited upside from here. We see significant risk to Chipotle’s traffic, which sequentially decelerated from 3Q to 4Q, even with price coming off the menu, if price is raised meaningfully.
Standing on my hands, over 1,000 miles from Miami, those are the points that I think matter for Chipotle’s shares going forward. The stock ripping yesterday was predictable but we would caution against chasing it unless you can get comfortable with our checklist above.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the S&P500 are now $1644-1691, $109.28-110.83, $3.61-3.71, $79.19-79.98, $1.32-1.34, $88.51-90.27 (oversold), 1.84-1.93%, and 1466-1484, respectively.
Function in disaster; finish in style,