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Why You Should Keep an Eye on Jim Chanos’ Recent Short Bets

Jim ChanosKynikos Associates reported an equity portfolio worth $190.41 million as of the end of 2015, which consisted of long positions in several companies, such as The Kroger Co (NYSE:KR), Verizon Communications Inc. (NYSE:VZ) and Dr Pepper Snapple Group Inc. (NYSE:DPS). However, Chanos is known as one of the best short-sellers on Wall Street. On May 4, Chanos is scheduled to be among the speakers at the Ira Sohn Conference in New York, alongside many other well-known investors, such as Jeff Smith of Starboard Value, or David Einhorn of Greenlight Capital (see list of speakers here). Hence, we decided to take a look at Chanos’ performance and some stocks that he admitted to be shorting.

Jim Chanos
Jim Chanos

For the largest part of the last several years, Kynikos’ short-focused funds posted a loss of around 35.3% be, while the market was in a bull run and the S&P 500 gained over 70%. The investor made a bet against China back in 2009 and, as we have seen recently, it was the right call, even though his timing was a bit off. In 2011 Chanos attended the Ira Sohn conference and suggested shorting alternative energy stocks, saying that alternative energy such as wind and solar were not efficient and the market overstated the growth in the number of jobs in the industry. Particularly, Chanos recommended shorting two stocks: First Solar, Inc. (NASDAQ:FSLR) and Vestas Wind Systems (trading in Denmark). Since then, First Solar’s Stock plunged by more than 50%, although Vestas Wind Systems more than doubled in value as Denmark stepped up efforts to ensure its energy needs from wind power. In 2013, as the world was becoming aware of the decline in PC market, Chanos suggested shorting hard drive producers, particularly recommending Seagate Technology PLC (NASDAQ:STX) as a short bet. Seagate’s stock has dropped by 29% since then and the PC market hasn’t shown any signs of improvement.

Now let’s fast-forward to 2015 and take a look at some stocks that Jim Chanos said that may be good short bets (he often doesn’t specify whether or not he actually has a short position in the stocks he discusses). Chanos’ position towards alternative energy has improved, but in October he said during an interview that he is short SolarCity Corp (NASDAQ:SCTY). Chanos considers that one of the main concerns regarding SolarCity Corp (NASDAQ:SCTY) is that the company is refinancing itself at a higher rate (of around 8%), which put it in the ‘junk’ credit range. In addition, Chanos called SolarCity a ‘subprime financing company’. However, Chanos said that he was bullish on the installation of solar and considered that the industry would continue to grow, which would lead to a decrease in costs.

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Another company that Chanos has probably shorted, although he neither confirmed nor denied it, is Tesla Motors Inc (NASDAQ:TSLA), having said last year that the stock was overvalued (an opinion shared by many, taking into account that 29% of its float is shorted). The manager of Kynikos said that Tesla Motors Inc (NASDAQ:TSLA) has a long way to go to transition towards a car manufacturer from a great high tech company. “[…] what Tesla had is innovation and a head start in this market that other companies are now catching up to,” Chanos said. In addition, the short-seller considers that the market oversees the fact that Tesla uses technology that is owned by other companies, such as Panasonic, whose battery technology Tesla is using. Tesla Motors Inc (NASDAQ:TSLA) and Panasonic are currently building the “Gigafactory” in Nevada, which will be engaged in mass production of batteries, on which Tesla relies to start the production of its budget Model 3 vehicle, which may put the company on the same position as larger car manufacturers.

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Energy is another sector in which Jim Chanos has identified some interesting targets for short-selling. During his presentation at the Robin Hood Conference in 2014, Chanos pointed out Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR), which has been in the middle of a corruption scandal tied to Brazil’s president Dilma Rousseff. The conference was in the middle of Brazil presidential elections and Chanos in an interview said that Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR)’s stock looked more like a scheme rather than a stock. The investor added that even if Rousseff were to lose the election, a new president wouldn’t have been able to sort all Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR)’s problems. Even though Rousseff won the elections, the consequent problems led to a drop in her approval rating and yesterday the lower house of Congress voted for her impeachment. Next month, the Senate will vote to open a trial against Rousseff, who is accused by opposition that she manipulated budget accounts to favor her reelection in 2014.

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Another energy stock that is one of Chanos’ more recent bets is Cheniere Energy, Inc. (NYSEMKT:LNG). In September 2015, Chanos called Chenier and the whole LNG segment a “looming disaster” since the company was investing in building LNG plants amid a drop in demand for liquefied natural gas. In this way, Cheniere Energy, Inc. (NYSEMKT:LNG) and other LNG companies are growing their capacity and are about to double it in the next four years, while the demand is not growing. It’s interesting to point out that Chanos disclosed its short position in Cheniere Energy, Inc. (NYSEMKT:LNG) a month after activist billionaire Carl Icahn announced an 8.2% stake in the company. Icahn further raised its stake to 13.83% and in December pushed for the removal of Chairman and CEO Charif Souki. Another energy company that Chanos is short is Royal Dutch Shell plc (ADR) (NYSE:RDS.A).

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Disclosure: none