Famed short seller Jim Chanos is not a fan of the restaurant sector. As a result, he is shorting burger chain stocks.
CNBC's Mike Santoli spoke with Chanos in an exclusive interview for CNBC PRO on the sidelines of the Delivering Alpha conference in New York last week. Santoli asked the hedge fund manager which areas of the market are attractive to bet against.
The "problem in the burger space, where we happen to have a number of shorts, is that the 800-pound Big Mac got better. McDonald's righted the ship and has now reinvested aggressively in its restaurants, in its franchisees and upping the game for everybody else," he said. The burger market "is a shrinking pie. When the big guy begins to take more of the shrinking pie that leaves a lot less for everybody else."
Shorting is a trading strategy that involves selling borrowed shares with a view that the stock will drop in value. The shares can be then be bought back later at a lower price and returned for a profit.
The investor did not specify which companies he is short. He did say his firm is not short McDonald's nor Shake Shack, but "everybody else pretty much is fair game" to bet against in the burger industry.
Chanos also explained why the restaurant industry's franchise business model is facing difficulties:
"Because you can only increase as a franchiser, your revenues by increasing units, increasing same-store sales for which you get royalties, or increasing your royalty rate. The restaurants are struggling so you can't increase the royalty rate. The reason why they are struggling is that same-store sales are declining, which means therefore to meet Wall Street's sometimes lofty goals you have to increase unit openings …. which exacerbates the [negative] trends."
Chanos is founder and managing partner of Kynikos Associates, one of the largest short selling investment firms in the world. He is lauded for his prescient negative calls on Enron and Tyco.