Caterpillar Inc. (CAT), Deere & Company (DE), Hewlett-Packard Company (HPQ): This Famous Short Seller Is Destroying Alpha

Hewlett-Packard Company (NYSE:HPQ)’s revenue is expected to be down 5.8% in fiscal 2013, and down another 1% in 2014. The PC industry is being killed by cannibalization from tablets and mobile devices, where Hewlett-Packard Company (NYSE:HPQ) doesn’t have a position in the mobile market. However, the company is looking to software/services to grow earnings. There are also growth opportunities in cloud computing.

Hewlett-Packard Company (NYSE:HPQ) is hoping that its enterprise business segment, accounting for nearly 50% of revenue, will help grow earnings as it tries to shake its over dependence on the PC market. Enterprise storage is included in this segment and made up 17% of 2012 sales, and enterprise services was 28%. These segments should also get a boost from the expected rise in company IT budgets as the economy rebounds.

Even with the near-term pressures, the company is still generating solid free cash flow (FCF). Over the trailing-12 months, the company generated FCF of over $11 billion, a free cash flow yield of over 20%.

All in all

The bottom line is that Chanos thinks one of the largest companies in the S&P 500 and major equipment company is a short. The thing about shorting Caterpillar Inc. (NYSE:CAT) is that investors must also pay out the 2.8% dividend yield. While the interim might be uneasy for Caterpillar, I am not comfortable enough with Chanos’ short thesis to jump on the short side.

Meanwhile, I think Deere & Company (NYSE:DE) could be a solid bet for investors. The company could even gain some market share from Caterpillar’s struggles. But the biggest benefit will be related to a strong global farming market.

As for Chanos’ other big short, Hewlett-Packard Company (NYSE:HPQ), I again am not overly excited about shorting the stock. Although the computer industry is struggling, HP is trading at a mere 7 times earnings, well below Dell Inc. (NASDAQ:DELL)’s 12.2 times. Although I would not want to be short HP, I wouldn’t be long either.

The article This Famous Short Seller Is Destroying Alpha originally appeared on Fool.com and is written by Marshall Hargrave.

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Marshall is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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