Kynikos Associates, managed by Jim Chanos, recently filed its 3Q 13F with the SEC. Chanos is a famed short seller, and he does report long positions, but it's most likely that they are hedges used to offset industry-related stock movements. After graduating from Yale with an economics degree, Chanos worked for various firms and then founded Kynikos in 1985—Kynikos is the Greek word for ‘cynic.’ Chanos has been in the business of short selling for more than 20 years, with one of his most notable calls being the short of Enron back in 2000-2001.
A new position during 3Q for Kynikos was Occidental Petroleum , which is now 3.2% of the fund’s 13F portfolio. The integrated oil and gas company expects production to ramp up in 2013 by 8%. Driving this production growth will be the U.S., expected to see growth of 8-10% through 2014. We believe these growth prospects make Occidental a ‘growth at a reasonable price’ play, given its 3.0% dividend yield and the fact that it trades at 10x earnings, below competitors such as Hess, Murphy Oil and Suncor.
Another new pick for Chanos is Starbucks . The new position takes the 19th spot in Kynikos’ 3Q 13F. Starbucks sits atop the coffee industry at a $37+ billion market cap, but trading at 28x earnings—seemingly high compared to Caribou, Tim Hortons and other smaller competitors. When looking at Starbucks' growth rate - five-year expected earnings growth of 18% a year - the coffee company’s high P/E no longer seems that unreasonable. Panera, another major player entering the coffee/breakfast market, also trades at 28x earnings.
Whole Foods Market was the major stock that Kynikos sold off last quarter, which was 4.8% of its 2Q 13F. The stock is up over 30% year to date and trades at 37x earnings. The organic food company’s trailing P/E is above conventional grocers, but still below major organic food grocer Fresh Market (48x). Worth noting is that Whole Foods is only expected to grow five-year EPS at 17% annually, compared to Fresh Market’s 23%. We believe this industry is still in its infancy and has high growth potential, but there might be better value plays. Whole Foods is also one of our five high-multiple stocks loved by hedge funds.
Kynikos sold off two major banks during the third quarter, Citigroup and JPMorgan Chase . The sell-off was over 30% in 2Q shares for both banks, and dropped JPMorgan to 16th and Citi to 17th in the rankings of its 13F. Citi and JPMorgan trade on different ends of the banking industry spectrum, with JPMorgan being considered one of the top-positioned banks, and Citi still in recovery mode. On a book value basis, JPMorgan is near the upper crust of the industry, and Citi is near the bottom. Despite the fact that the case can be made that JPMorgan is an industry leader paying a 3% dividend yield, and that Citi is a value play, we like neither.
Citi’s unexpected firing of Vikram Pandit as CEO leaves many questions unanswered. Although the change will likely be a long term positive for the bank, it is still a complex entity and we see possible restructuring as a strain on margins in the interim. We see JPMorgan as being valued fairly, and investors may be better off sitting on the sidelines for now. With the Fed’s plans to keep rates low through 2015, there will be continued pressure on net interest margins for the foreseeable future. Last quarter's net interest margin for JPMorgan came in at 2.43%, down 23 basis points year over year.
We see Occidental as a strong play in the oil and gas industry, one that also has solid growth prospects. We also like Starbucks’ continued ability to grow despite a tough economy, and see a positive economic outlook as an obvious boost for the company in the interim. Whole Foods is in a new industry we like, but there are other competitors that present better value. Chanos’ sell-off of the two banks gets no disapproval from us, as there are better value opportunities in the likes of Bank of America and Morgan Stanley.
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