Jim Chanos founded his hedge fund management company, Kynikos Associates LP, in 1985. The fund's strategy focuses on short selling. It is based on thorough research that attempts to identify "fundamental and large market failures in valuation." Over the past 27 years, Chanos successfully shorted stocks of several famous financial fiascos, including those of Baldwin-United, Commodore International, Coleco, Integrated Resources, Boston Chicken, Sunbeam, Conseco, Tyco International, and Enron. In fact, Barron's named his short position on Enron "the market call of the decade, if not the past fifty years."
Jim Chanos has held a bearish stance on China for a while, saying that China's bad debts dwarf those of Greece and Spain and that the Chinese property bubble is of "epic" proportions. While he primarily looks at short sale opportunities, Chanos also holds several fundamentally-attractive value picks as long positions, which often serve as hedges for his short positions. Four of his popular picks paying dividends are described below.
Deere & Co. (DE) is one of the holdings in Jim Chanos' portfolio. In the latest 13F filling with the SEC, Kynikos Associates reported owning 223,850 shares worth more than $18 million at the end of the second quarter. By revenue, the company is the world's largest farm and forestry equipment manufacturer. It also produces construction and landscaping equipment. The company's EPS grew at an average rate of 16.6% per year over the past five years, while dividends grew 15.3% per year over the same period. Analysts now expect lower annual rates of growth averaging about 10% per year for the next five years. Still, the company reported solid sales numbers in the previous quarter, with firm growth in international sales. The company just sold $1 billion in three- and five-year bonds at record low rates, bringing the 2012 debt issuance tally to $7.35 billion, the highest in the company's history. The slow economy is clouding the near-term outlook, but the company's future growth prospects remain intact.
Deere & Co. pays a dividend yield of 2.4% on a low payout ratio of 25%. Its competitors AGCO (AGCO) and CNH Global (CNH) do not pay dividends. Competitors Caterpillar (CAT) and Kubota (KUB) pay dividend yields of 2.4% and 1.6%, respectively. On a forward P/E basis, Deere & Co.'s stock is slightly undervalued relative to its respective industry. The stock is down 4% over the past year. Fund manager Donald Chiboucis (Columbus Circle Investors) has more than $146 million invested in the stock.
JPMorgan Chase & Co. (JPM) is the largest U.S. bank by assets. Jim Chanos reported holding 323,400 shares of the stock worth more than $11.5 million at the end of the previous quarter. Despite a financial crisis and interest margin compressions, the bank reported growth in its EPS averaging 3.3% per year over the past five years. Analysts forecast that JPMorgan's EPS will expand at a higher average annual rate of 7.2% per year for the next five years. The company has solid fundamentals and, despite a somewhat weaker top-line, has delivered EPS growth consistently, given its diversified businesses, cost discipline, and better credit quality.
JPMorgan pays a dividend yield of 3.2% on a low payout ratio of 28%. Its rivals Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) pay dividend yields of 0.1%, 0.5%, and 2.6%, respectively. JPMorgan's stock has a price-to-book ratio of 0.8, slightly higher than its industry's average of 0.7, but below the bank's five-year average ratio of 1.0. The company's ROE is at 9.2%, while its ROIC is 3.2%. For the reference, the overall banking industry's average ROE was 8.73% at the end of the second quarter of 2012, according to the FDIC. On a forward P/E basis, JPMorgan's stock is undervalued relative to the banking industry and the financial sector. The stock is popular with Paul Ruddock and Steve Heinz (Lansdowne Partners) who have more than $654 million invested in the stock.
Kohlberg Kravis Roberts & Co. (KKR) is a private equity and venture capital firm. It recently decided to enter into the hedge fund business as well. Jim Chanos owns 862,200 KKR shares worth some $11.1 million at the end of the second quarter. Over the past five years, the company saw its EPS grow at an average rate of 8.8% per year. Analysts forecast a robust EPS growth in the future, averaging a spectacular 35% per year for the next five years. KKR is currently in talks to acquire a controlling stake in Japan's struggling chipmaker, Renesas Electronics Corp., for $1.3 billion. The firm is also pursuing a robust expansion in the emerging markets. It is thinking about starting a debt fund worth between $750 million and $1 billion to invest in India. KKR's recent $30 million investment in a privately-held retailer Novo Holdco Ltd. is a bet on China's $38-billion youth apparel retail market. The private equity firm is also expanding in Brazil. Along with several other private equity firms, KKR has been subpoenaed by New York's attorney general in a probe of beneficial tax practices that included converting some management fees into fund investments, which are taxed at rates lower than those applied to ordinary income.
KKR pays a dividend yield of 3.6% on a payout ratio of 88%. Its peers The Carlyle Group (CG), Blackstone Group (BX), and Oaktree Capital Group LLC (OAK) pay dividend yields of 1.7%, 3.0% and 8.4%, respectively. The stock is attractive on a forward P/E basis. Among fund managers, John Rogers (Ariel Investments) and billionaire Leon Cooperman (Omega Advisors) are bullish about the stock.
Macy's, Inc. (M) is a $16-billion U.S. department store retailer. Jim Chanos reported owning 251,550 Macy's shares worth $8.6 million at the end of the previous quarter. Over the past five years, Macy's EPS and dividends grew at average annual rates of 10.1% and 3.2%, respectively. The company is expected to boost its EPS at an average rate of nearly 11% per year for the next five years. Despite the sluggish economic growth and weak employment figures, in August, the company was able to report comparable-store sales growth of 5.1% over the past year. The company's online sales have been on a tear, recording growth rates as high as 35% for the first eight months of this year compared with the same period a year earlier. The stock pays a dividend yield of 2.0% on a payout ratio of 25%. The company's rival J. C. Penney Company Inc. (JCP) suspended its dividend payments this year. Rival Saks Incorporated (SKS) does not pay any dividends, while Dillard's Inc. (DDS) pay a low yield of 0.3%. Macy's has an attractive free cash flow yield of 7.2%. The stock is undervalued relative to the broadline retailers industry but it is priced a little higher than its five-year average P/E. This stock is a new position in Jim Simons' RenTech portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.