Jim Chanos is the founder and president of Kynikos Associates. Chanos developed a strategy of looking for fundamental and large market failures in valuation. He usually commits to a large short-position of such stocks for a long period of time. Such investment strategy is almost the mirror image of Warren Buffett’s, which is investing in companies with strong fundamentals for long term. Chanos started building his reputation as a short seller in the 1980s. He worked as an analyst at several firms and later founded Kynikos, an investment firm specialized in short selling, in 1985.
Recently Kynikos released its latest holdings in a 13F filing. Though Chanos is known as a short seller, he invests in a few long positions that are actually hedges for his short positions. Even though his long positions are hedges, Chanos is still relatively bullish about these stocks. Instead of buying a sector ETF, Chanos preferred these long positions. This implies that Chanos expects these stocks to outperform their industries. Here are Chanos’ most bullish positions:
Amazon.com Inc (AMZN): At the end of last year, Kynikos had $6.5 million invested in AMZN, making it the largest non-ETF position in Kynikos’ 13F portfolio. The largest two positions at the end of 2011 were tow indexes: SPDR S&P 500 ETF (SPY) and iShares Russell 2000 Index (IWM). AMZN is a new position. At the end of the third quarter, Kynikos did not report to own any shares of AMZN. The fund bought 37,500 new shares of AMZN over the fourth quarter. AMZN is quite popular among hedge funds. There were 54 hedge funds with AMZN positions at the end of the third quarter. For example, Ken Fisher was the most bullish fund manager about AMZN. Fisher Asset Management had $547 million invested in AMZN. Amazon has a leading position as an online retailer. We like its long-term investments in Amazon Prime and Kindle Fire, which are very likely to bring about new sources of revenue in the near future. On the other hand, Amazon is faced with growing competition. One of the main competitors of AMZN is eBay Inc (EBAY). AMZN has a forward P/E ratio of 71.22 and its EPS is expected to grow at 26.99% per year in the next five years. Therefore, AMZN’s P/E ratio for 2014 is about 44, compared with 9.9 for EBAY. We think AMZN is overpriced relative to EBAY at this moment. We generally don’t recommend stocks that have sky-high PE ratios because of investor optimism and high expected growth rates.
VMware Inc (VMW): During the fourth quarter, Kynikos increased its VMW stakes by 53%. At the end of last year, the fund had $6.1 million invested in this position. VMW is also quite popular among hedge funds. Besides Kynikos, there were another 27 hedge funds with VMW positions at the end of September. Jim Simons’ RenTech was the most bullish hedge fund about VMW. The fund had $67 million invested in VMW at the end of the third quarter. We are not very bullish about VMW though. We think investors should “hold” this stock at best. We are concerned about the lower IT spending of the government and the financial industry. VMware also has a relatively short operating history and is slightly overpriced compared to its peers.
One of VMware’s peers is Citrix Systems Inc (CTXS). CTXS is as popular as VMW among hedge funds. There were 29 hedge funds reported owning CTXS at the end of September. CTXS has a forward P/E ratio of 23.45 and its EPS is expected to grow at 15.79% per year in the next five years. VMW has a forward P/E ratio of 31.82 and its EPS is estimated to grow at 23.57% on the average per year over the next five years. As a result, VMW has a 2014 P/E ratio of 20.8, versus 17.5 for CTXS. We wouldn’t recommend either of them because there are cheaper stocks in the market with similar growth profiles.
Another large position in Kynikos’ portfolio is Rackspace Hosting Inc (RAX). The fund reduced its RAX stakes by 13% over the fourth quarter. As of December 31, 2011, it had $6.3 million invested in RAX. RAX also does not look very attractive as it has a high forward P/E ratio of 60.78. Analysts estimate its EPS to grow at 30.35% on the average annually over the following five years. But it still has a high P/E ratio for 2014 of 36.
Chanos is also bullish about Apache Corp (APA) and BP Plc (BP). His Kynikos had $5.9 million invested in APA and another $5.6 million invested in BP. We like these two energy stocks. They are trading at attractive multiples. APA has a forward P/E ratio of 8.59 and is expected to grow at 11.22% per year in the next five years. BP’s forward P/E ratio is 6.76 and it is estimated to grow at 4.23%. We think energy stocks are undervalued as a sector. They can also protect investors from a decline in US Dollar. We especially recommend BP as it has a high dividend yield of 4.05%.
