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.