Jim Chanos' Top 10 Positions Returned 19% This Year

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Includes: AMZN, APA, BP, DE, IWM, JPM, MDY, RAX, VC, VMW
by: Insider Monkey

By Guan Wang

Jim Chanos is a famous short seller. His Kynikos Associates, founded in 1985, is one of the largest investment firms that specialize in short selling in the world. One of the most famous examples of Chanos' short-selling success is Enron Corporation. Chanos started to research into Enron in October 2000 and found its accounting method tended to overstate its earnings. So, he began to short Enron in 2001, continuously increasing his short position. In the end, Enron went broke and Chanos won fame and money - and that wasn't the only time his short sales hit big.

To date, the largest 10 positions in Chanos' 13F portfolio returned a weighted-average of 19%, versus 12% for the S&P 500 (NYSEARCA:SPY) index over the same period. These are the long positions Chanos initiated to hedge his short positions.

Table 1: Top 10 positions in Chano's 13F portfolio as of December 31, 2011

Company Name

Ticker

Value (*1000)

Activity

YTD Return

SPDR S & P MIDCAP 400 ETF

MDY

13461

141%

13.81%

ISHARES TRUST

IWM

8186

141%

10.92%

AMAZON COM INC

AMZN

6491

New

32.89%

RACKSPACE HOSTING INC

RAX

6340

-13%

36.13%

VMWARE INC

VMW

6139

53%

35.39%

APACHE CORP

APA

5924

4%

8.31%

BP PLC

BP

5578

5%

0.95%

VISTEON CORP

VC

5518

-21%

0.56%

DEERE & CO

DE

5202

-19%

8.35%

JPMORGAN CHASE & CO

JPM

4828

New

33.51%

Click to enlarge

Amazon.com Inc was the largest non-ETF position in Chanos' 13F portfolio at the end of 2011. It was also a new position in Chanos' portfolio. During the fourth quarter last year, Chanos initiated a new position in Amazon worth $6.5 million. The stock is quite popular amongst the other hedge funds we track too. At the end of last year, there were 50 hedge funds with Amazon in their 13F portfolios. John Griffin's Blue Ridge Capital had more than $300 million invested in this position at the end of last year. Ken Fisher, Chase Coleman, Bill Miller, and Jim Simons are also bullish about Amazon.

These money managers have all made a bundle from their positions in Amazon so far this year. The stock returned 32.89% year-to-date, outperforming the market by more than 20 percentage points. On April 26 after the market was closed, Amazon reported better-than-expected first-quarter results. Its revenue increased by 34% on a year-over-year basis to $13.2 billion, beating the analysts' estimate of $12.9 billion. Its net income was $130 million, or $0.28 per share, versus analysts' average estimated earnings of $0.07 per share. The strong earnings announcement led to a significant increase in Amazon's stock price. The stock closed at $195.99 on April 26, only to open at $224.83 per share the next day (up about 15%). Currently, Amazon is trading at around $230 per share.

However, while the company's earnings results beat analysts' expectations, its margins are lower than desirable. Amazon's gross margin is only 27.4%, versus 70% for eBay Inc (NASDAQ:EBAY). Moreover, it seems that the company will continue to face margin pressure, at least in the near future. Amazon is expecting its second-quarter sales to range from $11.9 billion to $13.3 billion, versus an estimate of $12.8 billion. The company also predicting its second-quarter operating income to be -$260 million to $40 million, compared with analyst estimates of $184 million. The outlook is a bit disappointing, to say the least. Plus, it seems likely that Amazon will continue to have high investments in 2012, which will further lower its margins. Therefore, we recommend a "hold" for Amazon at this moment.

Rackspace Hosting Inc is the best-performing stock listed above. It is up 36.13% so far this year, outperforming the market by about 24 percentage points. Chanos had $6.3 million invested in Rackspace at the end of 2011. A few other money managers are also in favor of this stock, including Bill Miller, who was the most bullish fund manager about Rackspace. His Legg Mason Capital Management disclosed owning $38 million worth of Rackspace shares at the end of last year.

Rackspace has robust revenue and strong earnings growth, solid cash flows and improving margins. Its 4Q11 revenue increased by 31.9% compared with the same quarter last year, beating its industry's average growth of 23.6%. Its EPS also increased significantly by 80% to $1.8 per share. Over the past couple of years, the company has demonstrated a pattern of positive earnings growth and we expect this trend will continue in the future.

Analysts are expecting Rackspace to make $0.80 per share in 2012 and $1.16 per share in 2013, versus $0.55 per share for 2011. Despite that, Rackspace's P/E ratio is still high compared with its peers. Its P/E ratio for 2013 is around 51, doubling the industry average. Its P/CF ratio is relatively low though - at about 22, a discount to the industry average of 37. The company's net operating cash flow has increased by 41.27% to $104.92 million for the fourth quarter last year, beating its industry growth rate of 15.62%.

VMware Inc and JPMorgan Chase & Co also had strong performance this year. Both stocks have returned over 30% since the beginning of 2012. VMware is also a popular stock amongst the hedge funds we track. Thirty-one hedge funds reported owning the stock at the end of the fourth quarter last year. Jim Simons' RenTech, for example, had nearly $100 million invested in VMware. As a large shareholder of VMware, EMC Corp (EMC) bought nearly 500,000 shares of VMware stocks in early January at prices ranging from $81-$85 per share. We reported the transaction in our previous article and recommended investors focus on stocks like this with large insider purchases. VMware is now trading at $114.35 per share.

We like JPMorgan too. Like many other financial stocks, the company is currently trading at low multiples. Its current P/E ratio is 9.7 and its forward P/E ratio is 8.7. JP Morgan's earnings are expected to grow at 6.75% annually over the next few years. We think the market is overly panicked about the financial crisis and we see potential in financial stocks like JPMorgan. Hedge funds seem to have identified this opportunity too. Nearly 80 hedge funds had JPMorgan in their 13F portfolio at the end of 2011, including Lee Ainslie's Maverick Capital, John Paulson's Paulson & Co, and John Griffin's Blue Ridge Capital.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.