Sohn Conference: Jim Chanos on Shorting Elon Musk, Valeant, and Alibaba

Is there anyone in the investment community who hasn’t heard about famed short-seller Jim Chanos? Highly unlikely! Mr. Chanos, founder and manager of Kynikos Associates LP, is best known for his public short of Enron, whose collapse is seen as one of the worst business failures in American history. The renowned and successful short-seller presented his market-moving investment ideas at the 2016 Ira Sohn Conference this week, which was attended by Insider Monkey. Thus, the following article will discuss several short investment theses of Mr. Chanos, as well as his thoughts and insights on the Chinese economy.

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Jim Chanos’ Short Thesis on Electric Automaker Tesla Motors

Let’s kick off our discussion by having a look at Jim Chanos’ short on Elon Musk’s Tesla Motors Inc. (NASDAQ:TSLA). The hedge fund manager said on CNBC’s ‘Fast Money Halftime Report’ from the Sohn Investment Conference that “one of our historical sign posts of a company in trouble is when numbers of senior people leave over a short period of time”, claiming that “Tesla fits that bill”. Earlier this week, the electric car marker confirmed that Vice President of Production, Greg Reichow, and Vice President of Manufacturing, Josh Ensign, were leaving the company.

However, Mr. Chanos’ short thesis on Tesla Motors Inc. (NASDAQ:TSLA) doesn’t solely rely on the executive exodus, pointing the finger to the profitability of Tesla’s business. “[…] this is a company that can’t forecast its deliveries one quarter out”, said the manager of Kynikos Associates. “And yet, everybody is confident about what they’re going to make in 2020 or 2025”. More importantly, the short-seller claims he would want Tesla Motors to make the Model 3 and sell it profitably, but he doesn’t “think they can do it”.

The shares of the electric automaker are down by 11% year-to-date, as the company’s narrower-than-expected loss for the first quarter was overshadowed by the news that the aforementioned manufacturing executives would be leaving. Daniel Benton’s Andor Capital Management had 1.00 million shares of Tesla Motors Inc. (NASDAQ:TSLA) in its equity portfolio at the end of December.

The next page of this article will discuss another “Elon Musk” short and Mr. Chanos’ thoughts on two other companies.

Mr. Chanos is Shorting Another Public Venture of Elon Musk

Famed short-seller Jim Chanos is also shorting SolarCity Corp (NASDAQ:SCTY), which is yet another public venture of Elon Musk. SolarCity installed more solar energy systems than any other company in the U.S last year, thanks to the company beginning to offer MyPower in the fourth quarter of 2014, under which customers were offered a 30-year loan to finance the purchase of a solar energy system. The residential solar giant “is losing money on every installation and making it up on volume”, according to the hedge fund manager of Kynikos Associates. “And that’s a problem when you have a levered balance sheet”. As a result, Mr. Chanos believes SolarCity Corp (NASDAQ:SCTY) “gets into financial trouble in 2016”.

At the beginning of this week, the rooftop solar developer announced that financial services group John Hancock Financial had invested $227 million in a diversified portfolio of residential, commercial, and industrial solar power projects, which simply means that the risk related to SolarCity customers’ possible failure to pay their bills diminishes. Mr. Chanos has criticized the company’s residential leasing model before, initially raising concerns in the summer of 2015. SolarCity shares are down by 64% in the past 12 months and are 54% in the red year-to-date. Murray Stahl’s Horizon Asset Management upped its stake in SolarCity Corp (NASDAQ:SCTY) by 79% during the March quarter to 19,097 shares.

Mr. Chanos Still Shorting Embattled Valeant

The short-seller has also been betting against shares of Canadian drugmaker Valeant Pharmaceuticals Intl Inc. (NYSE:VRX) since March 2014 and he continues to be short Vthe company. Mr. Chanos was initially betting against the embattled drugmaker because it was employing a “roll-up strategy”, which involved buying companies to spur growth and diversify revenue streams. “Roll-ups are usually accounting-driven, and we certainly think that’s the case in Valeant”, said the short-seller back in May 2014. However, Mr. Market didn’t listen to Mr. Chanos’ words initially, as Valeant Pharmaceuticals Intl Inc. (NYSE:VRX) shares climbed by approximately 37% in the first 12 months following his bet. Eventually, the shares of the Canadian-based pharmaceutical company started to tumble last September due to strong criticism over exploitative price gouging and questions about the practices of specialty pharmacy Philidor. Valeant shares are down by 84% in the past several months and continue to trade at depressed levels despite a series of positive news around the company, including that Perrigo Company plc Ordinary Shares (NYSE:PRGO) CEO Joseph C. Papa would take over the reins of leadership at Valeant.

Going back to Mr. Chanos’ still-short thesis on Valeant, he said that “It’s interesting because people are trying to bottom fish in this name thinking that the stock is cheap. But we think it’s anything but cheap. Everybody’s using metrics that are just as bad as Valeant’s accounting itself. And they’re excluding all of the bad stuff”, said the short-seller this week. Stockholm-based HealthInvest Partners AB, founded by Anders Hallberg and Carl Bennet, acquired a new stake of 370,000 shares of Valeant Pharmaceuticals Intl Inc. (NYSE:VRX) during the March quarter.

On the final page we’ll look at Mr. Chanos’ short on Alibaba.

Mr. Chanos’ Bearish Views on China and Alibaba

The Kynikos Associates founder reiterated his bearish views on China at the 21^st Sohn Conference, saying that the world’s second-largest economy “is the gift that keeps on giving on the short side”. Mr. Chanos has previously voiced his bearish views on the Chinese economy and companies exposed to it.

To that end, Mr. Chanos and his team are still betting against Alibaba Group Holding Ltd (NYSE:BABA), saying that “we’re shorting it for accounting reasons”. The noted short-seller has “real questions” concerning some metrics of the Chinese e-commerce giant, particularly its cash flow. Kynikos Associates does not seem to comprehend how profitable or unprofitable the “fulfillment side of the business [which delivers packages to customers]” is, guessing the business is not profitable. Mr. Chanos believes “there’s no real free cash flows” at Alibaba Group Holding Ltd (NYSE:BABA). The shares of the online retailer are up by 28% in the past three months, but are still 2% in the red year-to-date. Fang Zheng’s Keywise Capital Management initiated a 194,200-share position in Alibaba Group Holding Ltd (NYSE:BABA) during the January-to-March quarter.

Disclosure: None