On July 17th, famous short seller Jim Chanos of Kynikos (the short seller who played a key role in uncovering fraud at Enron and WorldCom) mentioned at the Delivering Alpha conference that he was short Caterpillar Inc. (NYSE:CAT) on its ties to mining, China (a known Chanos short thesis), and potential accounting issues. See Chanos’s most recent long stock picks. With demand for infrastructure and construction slowing down in China, commodity demand should fall, in his view; as a result, miners will invest less cash in capital expenditures (a key source of business for Caterpillar Inc. (NYSE:CAT)). In fact, Chanos argued that mining capital expenditures will collapse as opposed to the more moderate percentage declines expected by many analysts. Caterpillar Inc. (NYSE:CAT) fell about 2% on the day in response.
On the surface, Caterpillar Inc. (NYSE:CAT) seems like an aggressive pick for a short seller with a valuation of 12 times trailing earnings. However, the company’s recent results have not been good- revenue fell 17% in the first quarter of 2013 versus a year earlier, with net income down over 40%- and as we’ve mentioned Chanos’s thesis is that current mining cap ex numbers are not only unsustainable but about to plummet. Caterpillar Inc. (NYSE:CAT)’s Resource Industries segment did see a steeper decline in sales over this time frame, and profits for that segment were only about $480 million in Q1 2013 as opposed to $1.2 billion in the prior year period. Wall Street analysts expect the company to recover going forward, with EPS in the range of $8 in 2014 and beyond; Chanos thinks between $5 and $6 per share is more likely in the long term. With the current stock price being $86, that would leave quite a bit of downside if he proves correct.
We track quarterly 13F filings from hundreds of hedge funds and other notable investors as part of our work developing investment strategies (for example, we’ve discovered that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year). Our database also comes in handy for tracking interest in individual stocks. We can see that the Bill and Melinda Gates Foundation Trust owned more than 10 million shares of Caterpillar Inc. (NYSE:CAT) at the end of March 2013, making it one of the long-term investors five largest holdings (check out more stocks the trust owns). Renaissance Technologies, whose founder Jim Simons is now a billionaire, reported a position of 1.8 million shares (find Renaissance’s favorite stocks).