Jim Chanos, president and founder of Kynikos Associates, the world’s largest short-selling fund at $6.7 billion, recently gave a presentation at the annual Value Investing Congress in New York. The annual meeting is a place for value investors from around the world to network with other serious, sophisticated value investors, and benefit from the sharing of investment wisdom.
Mr. Chanos really made a name for himself after researching the accounting methods used at Enron and shorting the company before it collapsed. Now, Mr. Chanos has a new list of favorite companies to short.
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He calls Exxon Mobil (NYSE:XOM) a “slow value leak in an era of rising production costs.” The company has “very quickly gone from net cash to net debt,” Mr. Chanos explained. In 2006, upstream capital expenditure was $16 billion, but by 2010 it had climbed to $27 billion. He also says that Exxon’s purchase of XTO was an expensive bet on natural gas (NYSE:UNG).
Due to a changing industry, the next company on the short list is GameStop (NYSE:GME). The company is a nationwide retailer of computer and console video games, from Microsoft’s (NASDAQ:MSFT) Xbox to Sony’s (NYSE:SNE) PlayStation. Mr. Chanos explains that GameStop’s physical store business model is being destroyed by the digital distribution transformation. He calls GameStop shares cheap. “Boy is it cheap. But boy is it in a bad business. This is one you’re going to think is cheap all the way down,” he says. Improving quality of low-priced digital games will continue to threaten the traditional $60 price point. For example, Apple’s (NASDAQ:AAPL) iPad has new games from Electronic Arts (NASDAQ:ERTS) for less than $10.
For-profit colleges are receiving more scrutiny these days, and that presents a shorting opportunity to Mr. Chanos. He says, “I can’t think of a more predatory business in the United States than for-profit education. I think it’s a national shame.” He says the product is not bought, but sold. Traditionally high churn rates create enrollment issues, and for-profit colleges could run out of prospects. Possible shorts include ITT Education Services (NYSE:ESI), DeVry (NYSE:DV), and Career Education Corp. (NASDAQ:CECO). Shares of American Public Education (NASDAQ:APEI) recently took a 28% intra-day plunge after the US Marine Corps cut its Tuition Assistance Program funding. According to Reuters, the Marine Corps will now provide students with $175 per semester hour for undergraduate courses, down from $250 previously. This is particularly troubling for American Public Education, which is the parent of American Military University and, as of 2010, had a student base that was 62% US military. The Federal Reserve reports that the amount of student loans taken out last year crossed the $100 billion mark for the first time and total loans outstanding will exceed $1 trillion for the first time this year. Americans now owe more on student loans than on credit cards.
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