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Fat Wars: Is Jim Chanos Short ZELTIQ Aesthetics Inc (ZLTQ)?

Since institutional investors have released their equity portfolios for the end of the second quarter, Insider Monkey has analyzed the latest 13F filings of some 750 investors in order to determine the aggregate sentiment towards various stocks.

Interestingly, we noticed that although the number of funds long ZELTIQ Aesthetics Inc (NASDAQ:ZLTQremained unchanged at 19 quarter-over-quarter, the number of funds bullish on Cynosure, Inc. (NASDAQ:CYNO) went up by 11 to 25 during the second quarter. Among those 11 new shareholders was notorious short-seller Jim Chanos‘ Kynikos Associates LP, which initiated a long position that contained 73,367 shares of Cynosure worth around $3.57 million at the end of June. At the same time, Kynikos didn’t report holding shares of ZELTIQ. Given that Kynikos is known for shorting stocks and Zeltiq’s short float is 26.37%, we wonder if Jim Chanos is short ZELTIQ and long Cynosure as a pair trade. Let’s examine more in depth.

Hedge fund sentiment is an important metric for assessing the long-term profitability. At Insider Monkey, we track over 700 hedge funds, whose quarterly 13F filings we analyze and determine their collective sentiment towards several thousand stocks. However, our research has shown that the best strategy is to follow hedge funds into their small-cap picks. This approach can allow monthly returns of nearly 95 basis points above the market, as we determined through extensive backtests covering the period between 1999 and 2012 (see the details here).

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Pikul Noorod/

First, a little about ZELTIQ Aesthetics Inc (NASDAQ:ZLTQ) and Cynosure, Inc. (NASDAQ:CYNO). ZELTIQ’s main product is the CoolSculpting System, which uses controlled cooling to freeze body fat away. CoolSculpting is intended for healthy individuals who are already near the targeted body weight and just want to get rid of the stubborn fat to improve their figure. The CoolSculpting process typically takes about one hour and is non-invasive, so there is no need for anesthesia. Because CoolSculpting is a differentiated offering with a compelling value proposition, there has been a strong consumer uptake with ZELTIQ revenues having grown quickly over the past five years. Given ZELTIQ’s current North American market penetration of 13%, international penetration of 10%, and total addressable market size of $4 billion, ZELTIQ has a lot of growth ahead of it. Management believes the company is on track to deliver 20% revenue CAGR through 2019, at which time it will realize long term adjusted EBITDA margins of 25-30%. If that should happen, ZELTIQ should have around $522 million in annual revenues and earn over $1.30 a share assuming a 11% net margin in 2019.

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As a company that makes various products that treat diverse indications anywhere from hair removal to skin rejuvenation, Cynosure didn’t directly compete against ZELTIQ until late last year and this year, when it launched SculpSure, an FDA-approved, non-invasive device that removes stubborn fat in only 25 minutes. As SculpSure is a direct competitor to ZELTIQ’s CoolSculpting System, more SculpSure sales slows CoolSculpting’s growth and hurts ZELTIQ’s plan to grow revenue an average of 20% a year through 2019. Although Cynosure doesn’t break down exact SculpSure revenue numbers in its earnings reports, the company’s overall earnings were very good in the second quarter (EPS of $0.36 on revenue of $110.34 million, up 31.8% year-over-year, beating by $0.07 per share and $9.03 million), leading many analysts to believe that SculpSure adoption has been strong. With growth expectations for ZELTIQ high given the stock’s 31% year-to-date rally, we believe some short funds, with Chanos’ fund potentially among them, are anticipating that SculpSure’s continued growth to lead to potential earnings disappointments at ZELTIQ down the road.

On the next page, we give the smart money’s view on which stock is better.

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