Chanos Reduces ‘Painful’ Tesla Short, Tells Musk ‘Job Well Done’
(Bloomberg) -- Jim Chanos has been short Tesla Inc.’s stock for five long years. And although he’s reduced the size of the trade, he’s not done with it yet.
For the first four years, he says, it wasn’t such a bad short. The electric-vehicle maker’s stock wasn’t trouncing the market.
The last 12 months? That’s a different story, with Tesla climbing more than 700% and inflating its market capitalization to above half a trillion dollars. The company is now bigger than all but five members of the S&P 500 and will be added to the benchmark index later this month. Chanos has reduced the Tesla bet from the maximum short position of 5% of capital allowed at his hedge-fund firm Kynikos Associates.
“It’s been painful, clearly,” Chanos said in a Bloomberg “Front Row” interview.
The famed short-seller continues to takes issue with Tesla’s business model and valuation. Some investors see it as an electric-vehicle company, others view it as an autonomous-vehicle company, while still others treat it as a clean-energy play.
“It’s whatever people want to believe Elon Musk is touting,” said Chanos, pointing out that Tesla’s five straight quarters of profit are due to sales of regulatory credits rather than cars. Tesla trades at about 900 times trailing earnings, and more than 150 times estimated earnings for the next four quarters.
“I’ve never met Elon Musk,” said Chanos. “I’ve never had a conversation with him.”
If they were to meet? “I’d say, ‘job well done so far,’” he said.
By contrast, 2020 has been a tough slog for Kynikos in its 35th year. The firm has a traditional long-short hedge fund where passive index funds provide most of the long exposure, allowing Chanos to focus on the short side. Kynikos also offers a fundamentally chosen short portfolio that serves as an insurance policy for investors who are long the market.
But after the Federal Reserve cut interest rates to record lows in March and made clear it will step in with more help if necessary, he said few investors are worrying about significant downside risk, much less see the need to actively protect against a rising stock market.
Retail investors also help keep share prices buoyant, Chanos said. While he said it’s easier than ever to find companies that look attractive to short, many bearish bets are just not working. The firm is usually correct on about two-thirds of its picks, but only one-third of its shorts are currently panning out.
“Right now, people are doing really dumb things with their money. It can go on for a while, and you can lose lots of poker hands to people that are doing dumb things with their money,” said Chanos. “But over time, I would hope that basically, if you’re playing properly, you’re going to come out ahead.”
The current market euphoria is also creating a “golden age of fraud” that will be exposed over time, he said. It’s a topic Chanos is well-versed in -- he teaches a financial fraud class at his alma mater Yale University and made his name betting against Enron Corp. in 2000 after spotting accounting maneuvers to hide losses at the energy trading company before its collapse.
What’s different this time, Chanos said, is that investors keep bidding up stock of companies with questionable financial statements until the firms themselves finally admit wrongdoing. Suspected or actual frauds currently make up 30% to 35% of Kynikos’ short portfolio versus the typical 10% to 15%.
Chanos spoke with Bloomberg in a wide-ranging interview, including his skepticism about International Business Machines Corp.
IBM and Big Tech
IBM, whose revenue has shrunk in seven of the last eight years, is one of Chanos’ biggest short positions. Chanos said IBM has mitigated its deterioration through “financial engineering” -- most recently with plans to spin off its legacy IT-services business.
“The dead giveaway to us that the spinoff is being done for financial engineering reasons was that they’re saying it’s going to take the better part of almost 18 months to do,” he said. “And that’s crazy.”
Representatives from Tesla did not respond to requests for comment. A spokesperson for IBM declined to comment.
Chanos said IBM is an anomaly in the industry because it’s large and shrinking at a time when most tech companies are growing. As for mega-cap names such as Apple Inc., Alphabet Inc. and Facebook Inc., “they’re very, very high return-on-capital businesses,” he said. “If they trade at 20 times cash flow or something like that in a market with low interest rates, that certainly might be an appropriate valuation.”
©2020 Bloomberg L.P.