GO
Loading...

How Jim Chanos Spotted the HP Scandal

Scott J. Ferrell | Congressional Quarterly | Getty Images

While many investors were caught off-guard Tuesday morning by the giant, allegedly fraud-ridden write-down by Hewlett-Packard f the value of Autonomy, hedge fund manager Jim Chanos wasn't one of them.

(Read more: Hewlett-Packard Walloped by Charge Relating to Fraud)

Chanos, the founder of Kynikos (greek for "cynic") Associates said HP was one of the companies he regarded as "the ultimate value trap" in a presentation delivered in July at the Delivering Alpha Conference sponsored by CNBC and Institutional Investor.

(Read more: Jim Chanos: Hewlett-Packard Is 'Ultimate Value Trap')

Chanos related the story of why he began to consider shorting HP . He had been short Automony, the British cloud-based business software and data company. When HP bought the company at a hefty premium, this raised a red flag for Chanos. What's more, Chanos pointed out, several top Autonomy executives left the company shortly after the acquisition.

Although some investors believed that HP was cheap enough to be considered a "value stock" because its price-to-earnings ratio was relatively low compared to competitors, Chanos said that HP appeared to be masking the true costs of its basic R&D costs with spending through acquisitions. If those costs were expensed as operating costs rather than capitalized as acquisitions, then revenues and cash flow at HP were basically flat, Chanos said.

Chanos said that the attempt to grow through acquisitions—HP had done $37 billion in acquisitions over the last four to five years—had not paid off for HP and that its core businesses were struggling. The personal computing market, in particular, was under assault from mobile technology, with people increasingly abandoning laptops for tablets. The company was engaged in "value destruction through acquisition," Chanos said.

Chanos, who rose to fame after short-selling Enron prior to that company's downfall, was led to short HP because of the acquisition of Autonomy, a deal which HP now says was tainted with billions of dollars of fraud. Another very prescient call by Chanos.

Here are other stocks Chanos said were value traps in June:

Consol Energy,

Coinstar,

Petrobras.

Also: Spain's Banco Santander and Australia's Fortescue.

(Read more: The Top 10 States For Technology)

- by CNBC Senior Editor John Carney

__________________________

Follow John on Twitter. (Market and financial news, adventures in New York City, plus whatever is on his mind.) You can email him at john.carney@nbcuni.com.

We also have two NetNet Twitter feeds. Follow CNBCnetnet for the best of the days posts, including breaking news. Follow NetNetDigest for a feed of every single post each day.

You can also be our friend on Facebook. Or subscribe to John's Facebook page.

We're on Google Plus too! Click here for John's Google page.

Questions? Comments? Tips? Email us at NetNet@cnbc.com or send a text message to: 917-740-8477.

Call us at 201-735-4638.

Wall Street