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Jim Chanos’ Latest Short Is This Solar Stock

Jim Chanos is one of the most popular short sellers in the investment industry. He established Kynikos in 1985, with short selling as the guiding principle of the investment firm. In his latest takedown on China during CNBC’s “Halftime Report”, Mr. Chanos called the current slowdown in the Chinese economy “worse than you think.” The investment manager disclosed his doubts about the economy in 2010, while calling China “one large construction site.” He mentioned some of his short bets as well, including one new short that caught our attention, on SolarCity Corp (NASDAQ:SCTY). Chanos called it a “subprime financing company in effect,” as the firm provides solar panels on lease. He further called upon the negative EBIDTA of the firm and the rate at which it is burning cash.

While disclosing his viewpoint on the working model of SolarCity Corp, Mr. Chanos said, “And the residential model, I’d like to point out – SolarCity is really a subprime financing company in effect. You basically lease the panels from SolarCity. They put them on your house and they collect the lease payments. So in effect, if you put on the panels you have a second mortgage on your home because you hope it’s an asset, but in many cases it turns into a liability.”


SolarCity Corp (NASDAQ:SCTY) has had a difficult year so far, with its shares declining by 19.04% year-to-date. The solar energy company announced its second quarter financial results on July 29, reporting net revenue of $102.80 million and a diluted loss per share of $1.61. Its loss came out higher than the Thomson Reuters consensus estimate of a loss of $1.57 per share, over revenues of $90.16 million. Those results sent its shares up for a short period, before s strong bearish sentiment on the solar industry swept the market in August and took its toll on the stock. Despite its declining share price, the smart money aside from Chanos, was slightly more positive on SolarCity Corp (NASDAQ:SCTY) during the second quarter. 34 hedge funds held positions worth $1.28 billion on June 30, with the aggregate holdings increasing by 25.50% in comparison with the previous quarter. The shares of SolarCity were up by 4.43% during the second quarter.

Most investors can’t outperform the stock market by individually picking stocks because stock returns aren’t evenly distributed. A randomly picked stock has only a 35% to 45% chance (depending on the investment horizon) to outperform the market. There are a few exceptions, one of which is when it comes to purchases made by corporate insiders. Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned 118% over the ensuing 35 months, outperforming the S&P 500 Index by 60 percentage points (read the details here). The trick is focusing only on the best small-cap stock picks of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody.

The insiders of SolarCity Corp were optimistic on its stock, with two insider purchases in 2015. Brad W. Buss, the Chief Financial Officer of SolarCity, purchased 6,000 shares of the company on June 15, when shares were trading much higher than their current levels.

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