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."