Howard Penney turned bearish on Chipotle last year. David Yellen for Barron’s

Few restaurant analysts are as outspoken as Howard Penney, a managing director at Stamford, Conn.–based Hedgeye Risk Management, an independent research firm. An example of his work: an open letter to Chipotle Mexican Grill CEO Steve Ells as he went on a media tour late last year to apologize for the outbreaks of food-borne illnesses at his restaurants. “You forgot to include the most basic rule of food service,” Penney wrote. “Rule No. 1: Don’t make the guest sick. Rule No. 2: Don’t forget rule No. 1…congratulations on the successful transformation of an enviable brand into ‘just another food-service joint.’ ” This particular letter first appeared on medium.com, but Penney’s broadsides against a number of companies more frequently can be found on his Twitter feed @HedgeyeHWP. Clients like following his tweets, as well as his recommendations: For example, since Penney first published his Sell rating on Chipotle, the stock has fallen.

Penney spent more than 20 years following tobacco, beverages, gaming, and then restaurants for a number of Wall Street firms, including Morgan Stanley, before joining Hedgeye in 2008. We checked in with him about which restaurant stocks to buy and what a Trump administration might mean for the sector. For the details, read on.

Barron’s: Where do you come by your talent for straight talk?

Penney: My mother. I’m the youngest of four. My brothers bore the brunt of her straight talk, for the most part. From the beginning, she was clear on what we should do and not do. You could never miss school, for example. If you said, “Mom, I’m not feeling well,” she said, “Really? You are still going to school.”

And you imported this tactic when talking to companies?

I feel that since Reg FD came about [Securities and Exchange Commission Regulation FD says issuers must disclose material information to all investors at the same time], talking to management teams does you a disservice: They can give you only the party line until that changes. So if you come up with a differentiated view and want to put that forth to the CEO or the CFO or somebody like that, they give you boilerplate answers and try to talk you out of the work you’ve done, say you are wrong. Talking to management can do you more harm than good.

You got bearish on Chipotle [ticker: CMG] a year ago at $718. Nice call: It’s at $392. Why not advise people to cover their short positions?

They still don’t understand what return on incremental invested capital really means. It’s a broken company. The actions we have seen from management during the E. coli crisis tell us all we need to know about their inability to guide this company. They have displayed immense hubris, admitting wrongdoing only when they absolutely had to. Also, it seems undeterred in efforts to open new units at the same rate as precrisis levels. The 200-plus stores they will open next year will actually destroy shareholder value. Their couponing—buy one, get one free—actually creates more problems. Free food is a drug, and when you stop, consumers don’t come back. One thing management needs to do for the stock price and for overall profitability is to slow down growth. When your average unit volumes have gone down by 20%, your economic model has changed. Chipotle hasn’t adjusted to that new model. At the pace they’re growing, there’s lots of stress on the system. Profits are down, employee turnover is up, people are getting paid less. They can slow growth: Starbucks [SBUX] is a classic example. Recently, the new CEO of Red Robin Gourmet Burgers [RRGB] announced she is cutting capital expenditure by 50%-plus. She is deploying capital smartly, adjusting to the restaurant-industry reality of declining customer counts and stress on income levels because health care and rents are going up. People are going to supermarkets or eating at home. Chipotle needs to get rational.

What’s Chipotle worth?

On $8 in earnings per share over the next 12 months, at price/earnings of 25, $200 is a good single-point estimate.

What does a Trump administration mean for the companies you cover?

On the surface, a Republican administration would be better for the restaurant industry. The most important issue is minimum wage. We don’t know yet what a Trump administration will do with this issue. As a firm, Hedgeye believes that economic growth is slowing—and if you bought stocks when Ronald Reagan was elected in 1980, you were down 22% by the August 1982 recession low.

How difficult is the restaurant business right now?

There are different segments: quick-service restaurants, or QSR, like McDonald’s[MCD]; fast casual like Chipotle; family dining like IHOP, owned by DineEquity [DIN]; casual dining like Chili’s, owned by Brinker International [EAT]; fine dining like Double Eagle Steak House, owned by Del Frisco’s Restaurant Group [DFRG]. The fastest-growing in terms of units is fast casual. It is also the worst-preforming category within the restaurant space. The best is QSR. Think about it: People are trading down in this environment to lower-ticket items. The best-performing stocks today are Domino’s Pizza[DPZ], Papa John’s International [PZZA], and Wingstop [WING], the delivery businesses.

If that’s so, why aren’t you long McDonald’s?

It has difficult comparisons coming up. There is a wall of worry because of the introduction of all-day breakfast in the fourth quarter of last year. Once we get past that, we have a reason to own McDonald’s again. On the other hand, we like Panera Bread[PNRA], which I actually think could be a $500 stock in five years. [It’s currently $197.] Ron Shaich is one of the most underestimated CEOs in the space in terms of driving sales and profitability in a very difficult environment. Three years ago, he took his capital spending up and took his margins down. Now, on the backside of that spending, you want to own it because he will create a billion-dollar business out of delivery in the next five years—that is only 2.5% of the $40 billion delivery category. Currently, Panera’s delivery is less than $100 million. That will be huge for margins and profitability. There is a premium today on owning the last mile, delivering from store to home. Shaich will have a seat at that table because he has already gone down the road of investing in it.

In two years, you will see the value he created in delivering at lunch, rather than at 1 a.m. in some shady neighborhood. You can attract higher-quality people where the bulk of the business is delivering to an office in Boston or New York. They pay more; you get better tips. The $500-a-share potential is a combination of earnings growth driven by new sales channels like delivery and catering for Panera 2.0 [with consumers ordering online or by app], and Panera being repositioned as the critical player in the last-mile channel into the home.

Can 3G Capital, the Brazilian private equity firm, make the Burger King/Tim Hortons deal work? You once dismissed it as financial engineering.

That was one of my bad calls. You know, I was very bearish on them. They’ve done a great job. I’ve been bearish on Burger King, and it has actually lasted longer and done better than I thought, and Tim Hortons has extended [its success]. So I wouldn’t be short it.

Let’s talk about the grocery stores. Is Whole Foods Market [WFM] still relevant, since millennials are apparently buying their food at restaurants and convenience stores?

Absolutely. It’s a great brand, and people hate it. Whole Foods created some controversy a year ago with overcharging New York City customers. Yet it is a category leader, well managed. It has good margins. Yes, there is some incremental competition.Wal-Mart Stores [WMT] is now selling all-natural and organic. But the increased competition has caused them to reinvest in the business. Ultimately, that reinvestment will bring people back to the stores. It had a fairly decent fiscal fourth quarter. They might need to slow down their unit growth a bit. Like the entire supermarket space, it has been hit with deflation, so the comps have slowed. It trades at 20 times earnings. Its average P/E over the past five years was 26. If it goes back, you could see the stock up 30%, to $38.

Why are the same factors not at play for Kroger [KR]?

Kroger’s problem is its multiemployer pension plans, and a zero interest-rate environment. Their liabilities go up every quarter for the underfunded part. They have 355,000 employees. This is a lower number than the company’s official head count because Kroger states that most, but not all, workers are covered by the plans. They are disingenuous [about] what their plans cost every year. They said last year it was $260 million. Suddenly, last quarter, they had to increase it by $111 million. This is a problem. One plan, called the Central States, Southeast & Southwest Plan, will basically be bankrupt in five years. If the market goes down, the liabilities for these plans will go through the roof for Kroger, and they don’t have the balance sheet to support it because they’re growing too fast and spending too much on dividends and share repurchases. The last time Kroger had a real pension problem was in 2012, following the Great Recession; it traded at 12.5 times earnings. Put that same multiple on the current forward number, and you can see the stock at $28, down from $33.

One more stock. Why are you short Dave & Buster’s Entertainment [PLAY]?

It’s a challenged business model. The gains are very cyclical, and in a slowing environment, when same-store sales growth goes from high single digits to low single digits, that hurts your multiple. The business is games and food. The food comps are now negative year over year, which is a leading indicator of usage of the business.

Not many people go to Dave & Buster’s just to play games. There’s a good likelihood games goes negative. There is a high fixed cost to the businesses because games are expensive to install, run, and maintain. And there’s a lot of competition coming into the space. I could see it trade to $30 in the near future [from $46].

What’s the best meal you’ve ever had at the companies that you cover?

A steak dinner and multiple bottles of Far Niente wine at the Capital Grille in New York City, before Darden Restaurants [DRI] bought it. The most fun was fried chicken with Colonel Sanders at the Kentucky Derby when Yum! Brands [YUM] first came public. They make you numb with food at analysts’ meetings. But there is no better job on Wall Street than to eat out for a living.

Thanks, Howard.