Chanos: Caterpillar ‘Alpha Destroyer’, Has Accounting Issues

Chanos: Caterpillar ‘Alpha Destroyer’, Has Accounting Issues
Jim Chanos photo via Insider Monkey (CC BY-ND 2.0)

Caterpillar Inc. (NYSE:CAT), subsidiary of Dow, has taken a major hit after renowned short-seller Jim Chanos named the company his top short pick at the Delivering Alpha conference taking place today. Chanos is the founder and managing partner of Kynikos Associates, an investment firm that makes its money exclusively by short-selling companies.

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Chanos: Caterpillar ‘Alpha Destroyer’, Has Accounting Issues

What Chanos Thinks

In his talk, Chanos said that he thinks the current commodity super-cycle is drawing to an end as China and other developing economies finally cool down after more than a decade of incredible growth. As those economies slow, global mining will ‘return to the mean’ and companies like Caterpillar whose business model is based on such high growth are simply in “the wrong business at the wrong time,” said Chanos, who first identified China as a looming problem in 2010.

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But it’s not just a matter of bad luck, Chanos also points to Caterpillar Inc. (NYSE:CAT) having negative free cash flow after dividends, the way Caterpillar Inc. (NYSE:CAT) has handled a recent merger, and the CEO setting the bar unrealistically high. Between these missteps and what Chanos believes will be a difficult business environment he is recommending investors to take a short position on Caterpillar.

Caterpillar Inc. (NYSE:CAT)’s stock immediately fell after Chanos’ talk, dropping more than 2 percent in less than an hour. Even if the stock price bounces back after investors get over the initial shock of Chanos’ speech, his predictions will continue to influence the way people evaluate Caterpillar going forward.

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Michael has a Bachelor's Degree in mathematics and physics from Boston University and Master's Degree in physics from University of California, San Diego. He has worked as an editor and writer for several magazines. Prior to his career in journalism, Michael Worked in the Peace Corps teaching math and science in South Africa.
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