Jim Chanos is running the biggest hedge fund that employs mainly a short-selling strategy to obtain returns. Even though his fund, Kynikos Associates, invests in long positions as well, it has an equity portfolio of around $254 million, which is a small portion of the total amount of assets under management, which amount to $6 billion. In a recent intervention on CNBC, Mr. Chanos has discussed some of the companies that he is short on, such as Intel Corporation (NASDAQ:INTC) and Caterpillar Inc. (NYSE:CAT). In addition, the investor presented his thoughts about buyback programs and short strategy regarding oil stocks.
Regarding Intel Corporation (NASDAQ:INTC), Mr. Chanos said that PC makers are under some “discontinued pressure,” which is why he is short Intel over the last six months. The founder of Kynikos considers that the company’s stock might be overvalued since it was trading between $15 and $25 per share for a long time, and a couple of months ago it went up to around $35 per share. Moreover, the company is facing the same issues as PC makers. At the same time, Intel Corporation (NASDAQ:INTC) has missed taking advantage of the growing mobile devices segment and it has gross margins of 60%, which are too high among chip makers. On the other hand, Mr. Chanos is long Apple Inc. (NASDAQ:AAPL) with Kynikos reporting ownership of 63,115 shares in its latest 13F filing (down by 52% on the quarter). The investor considers that Apple is a company that continues to innovate and its stock can be bought at a lower multiple than some of its peers.
Intel Corporation (NASDAQ:INTC)’s stock has been trading in red on Friday, after the company reported its financial results for the fourth quarter and full 2014. Even though its revenue and EPS for the fourth quarter of 2014, which amounted to $14.72 billion and $0.74 respectively, came slightly above the estimates ($14.70 billion revenue, $0.66 EPS), the stock did not go up on the back of a weak guidance for the first quarter of 2015. The company expects its revenue to amount to $13.7 billion for the January-March period, while for the full year it expects revenue growth “in the mid-single digit percentage points.”
While Mr. Chanos is short on Intel, many investors seem to be bullish on the company. Jean-Marie Eveillard’s First Eagle Investment Management and Ken Fisher of Fisher Asset Management are two of the largest shareholders of Intel among funds that we track. In the previous round of 13F filings, First Eagle disclosed holding 40.33 million shares of the company, up by 3% on the quarter, while Fisher Asset Management reported ownership of 18.93 million shares, down by 1% on the quarter.
Another stock that Kynikos is short on is Caterpillar Inc. (NYSE:CAT). Mr. Chanos considers that the company is involved in three segments, two of which, mining and energy, are “increasinlgy challengened.” According to the investor the situation is worse than last year, when only the mining business was in trouble. In addition, Caterpillar Inc. (NYSE:CAT) is not likely to reach its EPS target of $6.50-$7.00, Mr. Chanos added.
Michael Larson’s Bill & Melinda Gates Foundation Trust is one of the funds that holds a long stake in Caterpillar Inc. (NYSE:CAT), which contains 11.26 million shares as of the end of September, while the $1.12 billion position amasses over 5% of the Trust’s equity portfolio.
Regarding oil stocks, Mr. Chanos said that the business model of big oil companies has changed because “the days of finding easy cheap oil is over” and now companies have to commit more money for drilling in the ocean or in the Arctic. Therefore big oil companies are struggling because on one hand they have long-term projects that involve high costs, while on the other hand the oil prices are declining because of cheap energy from shale and fracking oil; in addition, these companies have to deal with a lot of debt on their balance sheets. However, while discussing a short strategy in oil stocks, Mr. Chanos said that it is important to take each company separately, because aside from their price being impacted by the commodity prices, these companies have different balance sheets and cash flows.
About buyback strategy, Mr. Chanos considers that it works in some single cases, however, when the majority of companies are doing that, it is not a good signal. Generally, companies can either reinvest the capital or buyback shares and while the returns on capital are over 15%, the returns that can be obtained on buying back stock are just in high single digits, Mr. Chanos said. In addition, companies after buying back shares are more leverages, since they have less cash on their balance sheets, or, in case of some companies, they borrow money to buy back their own shares.
“In aggregate, there is so much buyback activity, that, in effect, corporate America is buying the stock market and that’s the thing you have to remember. And if returns on capital in corporate America are 15 to 20 percent and these CEOs are saying “on the margin I am happy to take 9,” what does that tell us about returns on capital going forward? That’s a real signaling. And, by the way, their timing is terrible. They are always buying back record amounts when the market is high,” Mr. Chanos added.