The King of Shorts, Jim Chanos is sharing his ‘Best Idea’ at the CNBC Institutional Investor Delivering Alpha Conference.
Chanos said that “some of the best shorts have been value stocks that just got cheaper and cheaper and went out of business… In our business people sometimes get lazy. They run basic metrics and then they stop… In the case of a value trap that can be a disaster.”
One industry where he’s seen this behaviour a lot is in technology. One should be especially mindful of a trap when they see the following signs: a seismic shift in tech, famous investors/managers, hindsight-driven investing, or a stock that uses management’s metrics.
Chanos’ ‘Best Idea’ is in the personal computer space. We know that tablets are going to grow their market share and replace laptops in many instances so that’s where he’s been poking around.
“Hewlett Packard presents the ultimate value trap for investors,” he said. People who are into will tell you the stock is cheap, there’s great free cash flow, have you look at their buy-backs etc.
As you look at the revenue stream, though, its been flat over a number of years. So has its cash flow. The company is relying on the $37 billion of acquisitions they’ve done over the last couple of years to look healthy.
“When something looks cheap be careful, there could be a reason it’s cheap…” Chanos said, and then added, “This company is destroying its value. Typically acquisitions destroy value.”
Business Insider Emails & Alerts
Site highlights each day to your inbox.