The Famous Hedge Fund Manager Who Slammed Fortescue Has A New Strategy For Shorting Stocks On Buybacks

Jim chanosREUTERS/Jessica RinaldiJim Chanos, founder and Managing Partner of Kynikos Associates

Jim Chanos, who runs Kynikos Associates, has developed a new strategy for shorting stocks, the famed short-seller told the Wall Street Journal’s Dennis K. Berman.

Chanos slammed Australian minter Fortescue at a conference in 2012, saying it would “materially” fall due to its exposure to the iron ore price and China.

He signalled the company out as a “value trap” and said its management team, at the time, was “somewhat promotional.”

His new investment thesis focuses on companies with stock buybacks.

Basically, Chanos believes that when companies engage in big stock buybacks they’re actually displaying a sign of weakness as opposed to strength, the report said.

It’s a sign that the companies think that their stock can return more than the their actual businesses.

The Journal’s article listed off a few examples of companies (IBM, Oracle, Honeywell) that had returns on stock buybacks that were significantly lower than the return on each company’s business assets.

“Corporate CEOs, with their massive share-buyback programs are in effect investing in the stock market rather than in expanding business opportunities at their companies. Either they expect higher returns from the market, or lower returns in their business, or some combination of both. Given their questionable track record in timing the market, this may be a cause for concern,” Chanos told the Journal.

He didn’t name specific stocks that he’s shorting in the Journal’s article.

Chanos made headlines in Australia in 2012 when he panned Fortescue at a conference, saying it would fall ”materially” because of its exposure

Read the full report at the WSJ >

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