In a market like this, where it seems everyone is waiting for the other shoe to drop, investors need every advantage they can get. And one of the best ways to protect yourself: closely watch the world's top investors -- like hedge fund manager Jim Chanos, aka the "king of shorting."
At the age of 57, Chanos earned this title by making short selling his preferred investing method, and he applies the strategy through his New York City-based hedge fund company Kynikos Associates (appropriately named since Kynikos means "cynic" in greek). Founded by Chanos in the 1980s, the firm manages about $4 billion through a mix of short-only and combination long-short funds.
Chanos first achieved global fame in 2001 when he made a killing on the collapse of former Wall Street darling Enron, a large U.S. energy firm that used accounting tricks and opaque financials to appear highly profitable for years but ultimately went bankrupt. During the financial crisis in 2008, when the market fell 37%, Chanos' short-only fund Kriticos soared 59%.
In the past year or so, Chanos has gained attention for shorting heavy equipment manufacturer Caterpillar (NYSE:CAT) and Canadian IT services firm CGI Group (NYSE:GIB), even though both have favorable analyst ratings and have performed very well recently. Because he believes China's economy is set for a crash, Chanos has also been shorting Chinese stocks.
Things like these are good to know because a short position by a guru like Chanos can serve as an early warning, giving investors a chance to react before a stock plummets. In fact, Chanos issued another such early warning in mid-May, when he announced he was short one of the most successful stocks of all time -- Keurig Green Mountain (Nasdaq:GMCR), maker of the wildly popular Keurig single-serving coffee brewer.
GMCR, up an astounding 24,000% since going public two decades ago, dipped briefly on this news. However, shares have since rebounded a bit, suggesting there's still time to consider the reasons for Chanos' bearishness on a stock still widely considered a very strong growth story.
In a brief interview initially aired on CNBC, Chanos offered several main reasons, beginning with a slowing of the company's core business of selling single-serve coffee brewers and premium specialty coffees.
Indeed, there's been a massive deceleration in growth of its revenues, which are only up about 17% since 2012 after rising nearly eightfold from 2008 to 2012. I suspect this has a lot to do with Keurig Green Mountain and the market it serves being much more mature, as well the firm now facing substantial competition whereas it used to be essentially the lone player.
Keurig Green Mountain Revenues, 2008 - Present
While Wall Street is elated about the new partnership with Coca-Cola (NYSE:KO) -- shares of GMCR have gained almost 47% since the venture was announced Feb. 6 -- Chanos expressed doubt about the deal. His main qualm is there might be a much smaller market than one might think for the type of at-home carbonated beverage machines and accessories that Coke/Keurig Green Mountain are planning to roll out sometime next year.
It's a good point. Just ask SodaStream International (Nasdaq:SODA), which has had an awful time lately despite its first-mover advantage in this market. As its first-quarter report showed, SodaStream has been doing pretty well internationally -- but not in the key North American markets where it must excel to maintain healthy sales and profits. SODA is down a whopping 42% this year.
The issue, Chanos says, is there are already convenient packaged sodas, which stay fresh in the refrigerator for long periods. Coffee, on the other hand, is something people brew at home daily because it's best when fresh (and doesn't keep for long). Thus, there's a huge market for home coffee brewers, while at-home soda making may end up as a niche market if not enough people see value in it -- which so far appears to be the case in North America.
Recent insider selling is yet another reason Chanos is shorting GMCR, and some of these sales have been quite large. For instance, on Feb. 11, independent director Jules Del Vecchio sold 60,500 shares of GMCR with a market value of $7.2 million. A week later, on Feb. 18, another independent director, Hinda Miller, dumped 42,100 shares, worth more than $5 million. In May and June, six different insiders sold a combined 59,621 shares, worth more than $7 million.
Wariness of GMCR is also prudent now simply because the stock has run up so much, gaining about 65% in the past 12 months. At this point, valuations generally look very rich relative to industry averages.
Keurig Green Mountain Valuation Metrics
Risks to Consider: I suspect much of the recent gains in GMCR are due to hype about the Coca-Cola partnership. So shares could take a huge hit if the at-home soda making proves to be as limited a market as Chanos believes.
Action to Take --> The fact that the King of Shorting has targeted Keurig Green Mountain may be a bit surprising, since right now it appears the firm can do no wrong. Certainly, its growth and profitability metrics for the past few years are outstanding, and the Coca-Cola partnership has clearly sparked investors' imaginations.
Nevertheless, the opinion of a renowned short seller like Chanos always warrants serious consideration, especially in this case since potentially over-exuberant GMCR shareholders could end up being blindsided. If you're a risk taker, you may even want to follow Chanos' lead and short GMCR, too.