Intel Corporation (INTC), Caterpillar Inc. (CAT): Jim Chanos Discusses His Short Picks, Oil and Buyback Programs

Regarding oil stocks, Mr. Chanos said that the business model of big oil companies has changed because “the days of finding easy cheap oil is over” and now companies have to commit more money for drilling in the ocean or in the Arctic. Therefore big oil companies are struggling because on one hand they have long-term projects that involve high costs, while on the other hand the oil prices are declining because of cheap energy from shale and fracking oil; in addition, these companies have to deal with a lot of debt on their balance sheets. However, while discussing a short strategy in oil stocks, Mr. Chanos said that it is important to take each company separately, because aside from their price being impacted by the commodity prices, these companies have different balance sheets and cash flows.

About buyback strategy, Mr. Chanos considers that it works in some single cases, however, when the majority of companies are doing that, it is not a good signal. Generally, companies can either reinvest the capital or buyback shares and while the returns on capital are over 15%, the returns that can be obtained on buying back stock are just in high single digits, Mr. Chanos said. In addition, companies after buying back shares are more leverages, since they have less cash on their balance sheets, or, in case of some companies, they borrow money to buy back their own shares.

“In aggregate, there is so much buyback activity, that, in effect, corporate America is buying the stock market and that’s the thing you have to remember. And if returns on capital in corporate America are 15 to 20 percent and these CEOs are saying “on the margin I am happy to take 9,” what does that tell us about returns on capital going forward? That’s a real signaling. And, by the way, their timing is terrible. They are always buying back record amounts when the market is high,” Mr. Chanos added.

Disclosure: none