Jim Chanos, manager of Kynikos focuses on short-selling stocks. Investors who seek to find investments on the long side which do not alarm professional short-sellers like Mr. Chanos can look to regulatory filings to find the companies Kynikos were recently buying. Recent additions include Activision Blizzard (ATVI), Liberty Media (LMCA), Macy's (M), and Visteon (VC). Kynikos holds these longs based either on their individual merit or as hedges for its short positions in other firms. In either case, these long holdings pass the smell test from an investment team that specializes in sniffing out problems. Furthermore, two of them are attractive investment candidates based on valuation.
Analysis Beyond Valuation Multiples
Many faux-value investments are flawed and end up revealing themselves as value traps. Mr. Chanos explained these value-mirages in a lengthy interview:
Probably our best ideas over the past ten or 12 years have been ideas that looked cheap and which actually ensnared a lot of value investors. The investors didn't realize that these businesses were deteriorating faster than their ability to generate cash. Eastman Kodak was a great example of that. A few famous value investors were buying it all the way down because they assumed that the decline in the business would be a slow glide that would allow the company to harvest cash flows for the benefit of shareholders. The fact of the matter is that, for most declining businesses, management tends to redeploy cash flow into things outside of their core competencies in a desperate attempt to save their jobs. In the case of Kodak, they took some of their patent proceeds and cash flow and invested in a printer business, which is another declining business model. They ended up being decimated by their own invention of digital photography. When analyzing Kodak as a short candidate, valuation was almost the last aspect that we considered because, as I said, some of the best short ideas can look cheap from a valuation standpoint.
Ultimately the challenge for an investor is to compare the market price of a share to the estimate of its value. If the share is underpriced, it is a buy candidate. If it is overpriced, it is a sell candidate. Mr. Chanos has found that many value investors fail to recognize structural changes to a company's operations which will impair or eliminate future cash flows, invalidating their estimates.
Stocks Kynikos Recently Bought
Changes to Kynikos long book were found by tracking changes in its 13F-filing for the fourth quarter of 2011 to its 13-F filing for the first quarter of 2012. Notable share purchases are listed below:
Additions to Long Positions (Thousands of Shares)
Old # Shares
New # Shares
Static valuations and growth estimates for these stocks vary considerably:
Liberty Capital Group
None of these firms are terribly overvalued when holistically considering all these price multiples; Visteon is cheap on a per sales basis and is reasonably price based on book value. However, of these stocks Activision Blizzard and Macy's are particularly attractive. Both firms trade at good price-to-free cash flow multiples and pay a dividend. These factors assuage any concerns like those mentioned by Mr. Chanos of a value firm attempting to allocate capital to malinvestment in hopes of a miracle. What's more, these two stocks have attractive growth prospects as well:
EPS growth past 5 years
EPS growth next 5 years
Liberty Capital Group
All-in-all, Macy's and Activision Blizzard are solid buy candidates. They are held by a legendary short seller, indicating that they do not raise concerns from the best financial sleuths. Moreover, these stocks trade at attractive price multiples, have good growth prospects, and are generating cash and returning it to investors in the form of dividends.
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