Jim Chanos still patiently waiting on HP collapse
For two years and now going on a third, the Delivering Alpha conference—co-hosted by Institutional Investor and CNBC—has brought together the finest financial minds to discuss the pressing issues of the day and share their acute understanding of the markets. Some, like Omega Advisors founder Leon Cooperman, strike with remarkable accuracy. The soon-to-be-septuagenarian scored a perfect ten out of ten with his stock picks on last year's Best Ideas panel.
Others can remind us just how difficult professional investing can be, even for a seasoned veteran.
Sitting alongside Cooperman and other luminaries, James Chanos laid out his best idea for 2012: shorting the stock of PC maker Hewlett-Packard Co.
That Chanos touted a short trade as his best idea should come as no real surprise. The name of his hedge fund firm, Kynikos, is Greek for cynic, and he was on the right side of one of the more newsworthy stock collapses in recent history—Enron. Chanos was one of the earliest traders to make sense of the Houston–based energy giant's suspect accounting via mark-to-model pricing, and profited handsomely.
But for now, albeit a year is only a year, it seems that Chanos's bearish outlook on the tech company—founded in a one-car garage in Palo Alto, Calif., that some call the birthplace of Silicon Valley—has missed the mark.
Since Chanos took the Delivering Alpha stage and called HP "the ultimate value trap," the company's stock has jumped almost 30 percent, from $19.30 to about $25.
Noting "a fly in the ointment" in the figures that could convince analysts the stock was in good condition from a value perspective, Chanos claimed that HP, among other unnamed tech companies, was hiding a lack of research-and-development spending through a breadth of acquisitions. Revenue and cash flow had been flat for the past four or five years, he said, while during the same time frame the company had spent $37 billion on acquisitions.
One of those acquisitions—British software maker Autonomy, which HP paid more than $10 billion for in 2011—is viewed as a disaster. Last November HP announced a write-down of $8.8 billion for Autonomy after uncovering what it said were questionable accounting practices used by the U.K. company to misrepresent its value. The news sent HP's stock tumbling down to a multiyear low closing price of $11.71 on Nov. 20, 2012.
Less than six months after he made his pitch, Chanos looked to have scored a major winner, with a 65 percent drop in price in the shares of HP. But since then the stock has more than doubled to its present level—a price firmly above the $19.30 the day of Delivering Alpha 2012.
HP's progress in the months since its November low surely came as a shock to Chanos, but did not seem to deter his overall outlook. During an appearance on CNBC's "Fast Money: Halftime Report" in late April, Chanos acknowledged he was still in the bet. "The secular story has not changed here," he said. "The headwinds still face them in every line of their business. Servers are still PCs, remember that."
As a PC maker in a tablet world, HP will probably no longer see the growth it had in years past. Chief Executive Meg Whitman, a former consultant with Bain & Co. and longtime CEO of eBay, who joined the company shortly after the Autonomy deal closed, has instead worked to minimize HP's debt situation. In the second-quarter earnings presentation on May 22, Whitman noted: "After returning more than a billion dollars to shareholders through share repurchases and dividends in the quarter, we improved our operating company net debt position for the fifth successive quarter." She went on to say that the company expected to be operating with net debt at levels prior to the Autonomy acquisition by the end of this fiscal year.
Revenues were down across the board, but cash flow from operations was up 44 percent from the same period in 2012. HP also announced a 10 percent increase in the next quarterly dividend, to 14.52 cents per share. These announcements continued to ease investors' concerns despite the drops in revenue, and the stock rose another 17 percent.
The computer has changed drastically, and smartphones like Apple's iPhone and those that use Google's Android platform offer what are for all practical matters handheld computers. Tablets have swarmed the marketplace, with market research firm IDC predicting shipments to grow almost 60 percent in 2013, while PCs should see negative growth for a second straight year.
HP has been able to avoid getting stuck in the PC slog. It is a far cry from its all-time high price of $73, but investors, as seen through the steadily rising stock price, seem confident in Whitman's ability to run the company. HP's modest fortune coincides with the ongoing uncertainty at rival Dell. Stuck in a quagmire pitting Carl Icahn and Southeastern Asset Management against founder Michael Dell and Silver Lake Management in a fight for ownership of the tech company, Dell has painted an uncertain picture for investors, though not necessarily a messy one—its stock price is up more than 10 percent since last year's conference, where Chanos mentioned it as a short trade as well.
In the meantime, Chanos will be back on July 17 at the Pierre Hotel in New York City for the third annual Delivering Alpha conference to seek redemption with his next big idea.
Hedge-fund managers are a competitive bunch, so expect Chanos to come out swinging this year.