For two years and now going on a third, the Delivering
Alpha conference co-hosted by Institutional Investor
and CNBC has brought together the finest financial minds
to discuss the pressing issues of the day and share their acute
understanding of the markets. Some, like
Omega Advisors founder Leon Cooperman, strike with
remarkable accuracy. The soon-to-be-septuagenarian scored a
perfect ten out often with his stock picks on last years
Best Ideas panel.
Others can remind us just how difficult professional
investing can be, even for a seasoned veteran.
Sitting alongside Cooperman and other luminaries, James
Chanos laid out his best idea for 2012: Shorting the stock of
PC maker Hewlett-Packard Co.
That Chanos touted a short trade as his best idea should
come as no real surprise. The name of his hedge fund firm, Kynikos, is Greek for cynic, and he was on
the right side of one of the more newsworthy stock collapses in
recent history Enron. Chanos was one of the earliest
traders to make sense of the Houston-based energy giants
suspect accounting via mark-to-model pricing, and profited
But for now, albeit a year is only a year, it seems that
Chanoss bearish outlook on the tech company
founded in a one-car garage in Palo Alto that some call the
birthplace of Silicon Valley has missed the mark.
Since Chanos took the Delivering Alpha stage and called HP
the ultimate value trap, the companys stock
has jumped almost 30 percent, from $19.30 to about
Noting a fly in the ointment in the figures that
could convince analysts the stock was in good condition from a
value perspective, Chanos claimed that HP, among other unnamed
tech companies, was hiding a lack of research-and-development
spending through a breadth of acquisitions. Revenue and cash
flow had been flat for the past four or five years, he said,
while during the same timeframe the company had spent $37
billion on acquisitions.
One of those acquisitions British software maker
Autonomy, which HP paid more than $10 billion for in 2011
is viewed as a disaster. Last November HP announced a
write-down of $8.8 billion for Autonomy after uncovering what
it said were questionable accounting practices used by the U.K.
company to misrepresent its value. The news sent HPs
stock tumbling down to a multiyear low closing price of $11.71
on November 20, 2012.
Less than six months after he made his pitch, Chanos looked
to have scored a major winner, with a 65 percent drop in price
in the shares of HP. But since then the stock has more than
doubled to its present level a price firmly above the
$19.30 the day of Delivering Alpha 2012.
HPs progress in the months since its November low
surely came as a shock to Chanos, but did not seem to deter his
overall outlook. During an appearance on CNBCs Fast
Money: Halftime Report in late April, Chanos acknowledged
he was still in the bet. The secular story has not
changed here, he said. The headwinds still face
them in every line of their business. Servers are still PCs,
As a PC maker in a tablet world, HP will probably no longer
see the growth it had in years past. Chief
executive Meg Whitman, a former consultant with Bain & Co.
and longtime CEO of eBay, who joined the company shortly after
the Autonomy deal closed, has instead worked to minimize
HPs debt situation. In the second quarter earnings
presentation on May 22, Whitman noted, After returning
more than a billion dollars to shareholders through share
repurchases and dividends in the quarter, we improved our
operating company net debt position for the fifth successive
quarter. She went on to say that the company expected to
be operating with net debt at levels prior to the Autonomy
acquisition by the end of this fiscal year.
Revenues were down across the board, but cash flow from
operations was up 44 percent from the same period in 2012. HP
also announced a 10 percent increase in the next quarterly
dividend, to 14.52 cents per share. These announcements
continued to ease investors concerns despite the drops in
revenue, and the stock rose another 17 percent.
The computer has changed drastically, and smartphones like
Apples iPhone and those that use Googles Android
platform offer what are for all practical matters handheld
computers. Tablets have swarmed the marketplace, with market
research firm IDC predicting shipments to grow almost 60
percent in 2013, while PCs should see negative growth for a
second straight year.
HP has been able to avoid getting stuck in the PC slog. It is a far
cry from its all-time high price of $73, but investors, as seen
through the steadily rising stock price, seem confident in
Whitmans ability to run the company. HPs modest
fortune coincides with the ongoing uncertainty at rival Dell.
Stuck in a quagmire pitting Carl Icahn and Southeastern Asset
Management against founder Michael Dell and Silver Lake
Management in a fight for ownership of the tech company, Dell
has painted an uncertain picture for investors, though not
necessarily a messy one its stock price is up more than
10 percent since last years conference, where Chanos
mentioned it as a short trade as well.
In the meantime, Chanos will be back on July 17 at the
Pierre Hotel in New York City for the third annual Delivering
Alpha conference to seek redemption with his next big idea.
Hedge fund managers are a competitive bunch, so expect
Chanos to come out swinging this year.