Famed Short Seller Jim Chanos Bets Against Caterpillar

Joe Goldman |

Just minutes after reaching monthly highs, Caterpillar (CAT) shares plunged after Jim Chanos announced he is shorting the stock.

Chanos, one of Wall Street’s most famed and seasoned short-sellers, is shorting Caterpillar because he foresees the end of a global commodities “supercycle” and accounting red flags within the company.

Chanos argued at CNBC’s Delivering Alpha conference that infrastructure investment in China and heightened global demand for building equipment are coming to an end. According to Forbes, 30 percent of Caterpillar’s revenue and half its operating profits are connected to global mining capital expenditures. Thus, Chanos expects Caterpillar's profits to dwindle in the coming years.



Chanos also sees problems in Caterpillar’s acquisition accounting practices. He argued that Caterpillar took huge write-downs when it acquired Bucyrus and Siwei Mecanical and Electrical Manufacturing, temporarily reflecting larger, fabricated profits.                                                                                           

“When you see a company claim earnings synergies by buying a company then writing down its net assets below zero, be wary,” he said.

If his projections come to fruition, Chanos believes that Caterpillar’s will eventually earn $5 to $6 per share. Caterpillar currently earns over $7 per share, and with a slower growth rate, diminishing profits, and an inability to increase its cash dividend, the stock would likely plunge to below $50.

Jim Chanos, moreover, isn’t just some average Joe investor. He became famous after recognizing Enron’s fraudulant accounting practices and shorted the stock before it went bust. He also predicted the demise of Hewlett-Packard (HPQ) and Dell (DELL) several years ago, among others.

Shares of Caterpillar reached a high of $89.00 Wednesday morning, but plunged to below $86 after Chanos’ statements. Shares are down 3.5 percent year-to-date.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
HPQ HP Inc. 14.73 -0.13 -0.87 14,687,037
CAT Caterpillar Inc. 94.58 1.20 1.29 5,045,228
MPFRF Mapfre SA 2.90 0.00 0.00 0

Comments

Emerging Growth

Immunovaccine Inc.

Immunovaccine Inc is clinical stage biopharmaceutical company. The Company develops products based on its proprietary vaccine enhancement platform in T cell activating therapies for cancer.

Private Markets

Almond Smart Home Router by Securifi

Securifi sells user friendly touch screen routers that also have support for IoT/home automation.Securifi’s Almond revolutionized wireless router setup with its easy to use Touchscreen Interface in 2012. Now our…

8tracks

Our mission is to be the best place for people who care about music to create and discover thoughtfully curated playlists. In essence, 8tracks is a platform for online mixtapes.