Pershing Has Stepped In Front of a Ticking Time Bomb | $CMG

Takeaway: The Pershing investment does not change my Chipotle thesis for the time being, but I have been put on notice.

Editor's Note: The following note written by Hedgeye Managing Director Howard Penney (originally entitled CMG | This Is Why I Play) was sent to our institutional subscribers yesterday. It was written in response to news that activist investor Bill Ackman's Pershing Square has taken a 9.9% stake in Chipotle. Email for more info on Penney's research.


Pershing Has Stepped In Front of a Ticking Time Bomb | $CMG - z cmg


Chipotle (CMG) is on the Hedgeye Best Ideas list a as a SHORT.


Obviously, the fact that Pershing filed a position in CMG does not change my short thesis overnight.  Should I try to understand their bull case?  Absolutely! I hope one day we can meet to talk about what they see that I don’t. 


I have a good track record in sniffing out when activists are going to get involved in a restaurant name, but I clearly missed this one.  As I see it, CMG does not have the common traits of an activist name.


First, there is no real estate to sell or significant non-core assets to sell like in Darden.  The G&A is fairly lean given it’s a growth restaurant company and management is loved by shareholders.   According to the proxy vote, Chipotle's co-CEOs, including founder Steve Ells, were reelected and received more than 95% of the shareholders' votes.


CMG has no funded debt, so we could see him push to leverage the company and buy back stock, but that is just financial engineering and will not get anyone very excited.  The company has previously announced they are looking for a new board member so I’m sure the new shareholder will be happy to help in that regard and maybe a few other corporate governance issues.


Pershing’s big wins in the restaurant space were WEN, MCD, and QSR.  In the case of WEN, at the time of the investment the Tim Horton business represented the entire vale of the company so you were getting the Wendy’s business for free.  The MCD story was to refranchise the company store base and spin it out as a separate business.  The deal never happened but the stock worked any way (the turnaround was well underway).  QSR story was a straight sell all company stores and become an asset light model.  This was a home run!


An asset light business model was the common characteristic of all three of Pershing’s previous restaurant investments.  The “asset light models” are clearly the safest way to invest in the restaurant space.  Obviously, CMG is anything but an asset light model and will likely never become one as it is not in their DNA.  Converting CMG to an asset light model would be very expensive and dilutive to EPS.       


As with most activist situations, that leaves the Pershing investment in CMG dependent on an operational turnaround as the way to create significant shareholder value.  While they are familiar with the industry, rarely can an activist be much help in fixing operations.  In most cases, the activist’s ideas are short term in nature to get a pop in the stock and then they are gone.


Putting it all together, this leaves me to conclude they see a big operational turnaround as the way to make money in CMG.  This thought process is confirmed by the 13D. According to the 13D "Pershing argues Chipotle has "a strong brand, differentiated offering, enormous growth opportunity, and visionary leadership." 


Let’s take these one by one:

  1. A strong brand – I agree it’s a strong brand and one day it may return to the glory days but that is going to take time and will require an investment in better advertising. 
  2. Differentiated offering – That may have been true 10 years ago, but the rest of the industry is catching up.  We made this point in the CMG black book.
  3. Enormous growth opportunity - Could CMG double its store base from here? Yes! Right now the company needs to slow growth, fix operations and repair the brand.  The law of diminishing returns is impacting the numbers.  Importantly, there is a lack of great real estate right now and it’s getting too expensive to grow.
  4. Visionary leadership – I agree that Steve Ells is a visionary, but it ends there.  Being a visionary will not get the company out of the problems they are experiencing today.  The company needs new management to help get it to a better place.  I have no doubt Pershing can help in this regard, but replacing the founder is going to be very difficult!


The Pershing investment does not change my thesis for the time being, but I have been put on notice.  As we noted in our CMG deck, the FDA’s Office of Criminal Investigation does not get involved with many companies and when they do its usually a serious situation.  I’m very surprised Pershing stepped in front of this ticking time bomb.  On the other hand, if criminal charges are brought against some CMG executives, Pershing will have an easier time finding a new management team. 


Game On! 


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw



ECB September Meeting – Nothing New!

Again we repeat our commentary:  Is the ECB worried about the low inflation environment?  YES!  Does it know what else to do from a policy perspective to spur real growth and inflation?  NO! 


In today’s ECB monetary policy decision meeting, President Draghi underlined a few main points:

  • Rates are expected to stay at present or lower levels for an extended period of time, well past the horizon of asset purchases.
  • Monthly asset purchases of €80 billion are intended to run until the end of March 2017, or beyond, if necessary.
  • If warranted, the ECB will act to use all instruments in its tool belt to support economic conditions.

Our quick read-through:

  1. Growth and inflation will remain lower and slower for longer than the previous time horizon (see the downgrade in updated ECB staff projections below).
  2. The ECB will have to extend the scope of its Asset Purchase Program, can you say #HelicopterMoney?!


GIP Flashes Quad 3:


Our proprietary GIP (growth, inflation, policy) model shows the Eurozone stuck in Quad 3 - growth slowing as inflation accelerates - for the remainder of 2H 2016 and into early 2017. 

ECB September Meeting – Nothing New! - EUROZONE


And we reiterate the huge challenge before the ECB to lift inflation:  the latest Eurozone CPI for August printed +0.2% Y/Y, unchanged from the prior month and below the 0.30% forecast.  CPI has been at or below 0.3% for 22 straight months, and far from the ECB’s medium term 2.0% target!

ECB September Meeting – Nothing New! - CPI


Today’s Decision: the ECB kept its main interest rates and Asset Purchase Target on hold:  

  • Main Refinancing Operations unch at 0.00%
  • Marginal Lending Facility unch at 0.25%
  • Deposit Facility unch at -0.40%. 
  • Monthly Asset Purchase Target unch at €80B

ECB September Meeting – Nothing New! - ECB rates


ECB Staff Projections Downgraded:

  • Eurozone GDP Projections at 1.7% in 2016 (vs prior June projection of 1.6%), 1.6% in 2017 (vs 1.7% prior), and 1.6% in 2018 (vs 1.7% prior).
  • Eurozone CPI Projections at 0.2% Y/Y in 2016 (unch vs prior), 1.2% in 2017 (vs 1.3% prior), and 1.6% in 2018 (unch vs prior).


Weighing the Euro:  We’re playing our trading risk range of $1.11 to $1.13 on the EUR/USD and have a bearish intermediate term TREND bias on the cross.

ECB September Meeting – Nothing New! - EUR USD 9 8


[UNLOCKED] Keith's Daily Trading Ranges

[UNLOCKED] Keith's Daily Trading Ranges - dtr

This is a complimentary look at today's Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough. Click here to view a brief video of McCullough explaining how to use it most effectively.

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Stocks, bonds, commodities – all lovin’ it, the US #GrowthSlowing data in AUG that is…

Client Talking Points


On the latest “rate hike” fears (i.e. when the SP500 was down for 8 of 10 days in AUG), we got as net long as we’ve been in all our products, all year – conviction in #GrowthSlowing was the call. Now, after the move, we say you sellem’ – yep, just a trade (for now), but SP500 all-time high is the best price in market history to book some gains.


If you think it’s all about naval gazing at the Dow, Bro – it’s not. In fact, it’s Draghi Day! He’s back from extended vaca to remind you that the FX War is very much on… and while the Down Dollar, Down Rates thing is fun for anyone who is long anything (other than Japanese Stocks); we think he tries very hard to back the EUR/USD off at $1.13-1.15.


The Doctor, once again, is checking out of this Bad Data = Good Reflation Rally, 1st – Copper -0.1% this morning, resuming its crash and genuine disinterest that global demand (vs. Bernanke’s supply bubbles) has “bottomed”.

Asset Allocation

9/7/16 58% 4% 4% 7% 23% 4%
9/8/16 59% 2% 4% 6% 23% 6%

Asset Allocation as a % of Max Preferred Exposure

9/7/16 58% 12% 12% 21% 70% 12%
9/8/16 59% 6% 12% 18% 70% 18%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration

See updates below.


Income & Consumption

Slowing employment growth + a decline hours worked + deceleration in earnings growth will = a deceleration in aggregate income growth when the official data are reported at the end of the month.  Absent a significant decline in the savings rate and/or significant re-acceleration in credit growth, consumption growth can be expected to track income growth lower. 


Industrial Activity 

The -14K decline in manufacturing employment in August accords with the retreat in the employment subcomponent in the ISM manufacturing report.  Lower manufacturing employment and a slowdown in manufacturing hours worked also points to a sequential decline in Industrial Production when that data is reported later in the month.  In short (and in the short-term), bad economic data is good as falling rate hike expectations support asset price inflation.  Over the intermediate-term, "slower-and-lower-for-longer" continues to characterize the growth, inflation and interest rate outlook and support #GrowthSlowing allocations in bonds, gold, and dollars.   While incremental dovishness from the Fed may serve as a short-term headwind to the dollar, the structural case for the $USD amidst ongoing policy divergence between the U.S. and the balance of global DM markets remains intact.   

Three for the Road


Cartoon of the Day: Raging Bull… via @Hedgeye #stocks $SPY #Yellen #Fed #markets



“Everybody loves success, but they hate successful people.”

–John McEnroe


Daniel Murphy leads the MLB in BA, hitting .345.

September 8, 2016

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  • Bullish Trend
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10-Year U.S. Treasury Yield
1.60 1.50 1.54
S&P 500
2,165 2,190 2,186
Russell 2000
1,232 1,265 1,261
NASDAQ Composite
5,180 5,289 5,283
SPDR S&P Oil & Gas Explore
35.28 38.25 38.09
1,225 1,252 1,250
Nikkei 225 Index
16,396 17,205 17,012
German DAX Composite
10,485 10,778 10,752
Volatility Index
11.43 14.39 11.94
U.S. Dollar Index
94.21 96.50 94.95
1.11 1.13 1.12
Japanese Yen
99.81 104.30 101.75
Light Crude Oil Spot Price
42.91 48.50 45.55
Natural Gas Spot Price
2.60 2.89 2.68
Gold Spot Price
1,301 1,361 1,349
Copper Spot Price
2.05 2.12 2.09
Apple Inc.
105.50 108.89 108.36
752 791 784
J.P. Morgan Chase & Co.
65.70 68.01 67.16
Intel Corp.
35.20 36.99 36.46
Las Vegas Sands Corp.
52.20 56.31 55.05
Chipotle Mexican Grill
399 446 438

Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, along with our intermediate-term (TREND) view.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.

CHART OF THE DAY: My Highest Conviction Macro Call

Editor's Note: Below is an excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more. 


...For 14 months, my highest conviction macro “call” has always been to fade rate hike fears, buy bonds (and stocks that look like bonds) and to stop being concerned about rates rising until the US growth data starts to undergo a phase transition into #GrowthAccelerating.


That’s why some people really don’t like me. They’re the guys who are short bonds on “valuation” and long the Financials on the same. With the 10yr US Treasury Yield having crashed -32% to 1.53% YTD (Utes and TLT +16% YTD vs. Financials up less than 3%) I don’t suck in 2016.


CHART OF THE DAY: My Highest Conviction Macro Call - EL 09.08.16 chart

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