Jim Chanos short ideas usually attract much attention. Chanos is Founder and Managing Partner of Kynikos Associates LP., possibly most famous short biased hedge fund. He spoke at the Ira Sohn Conference on May 8 regarding his latest ideas. Previously, Chanos disclosed that he holds short positions in Dell Inc. (NASDAQ:DELL) and Hewlett-Packard Company (NYSE:HPQ). At the Ira Sohn Conference, Chanos made his case for shorting PC components, including hard drives.
Jim Chanos Short Ideas: Microsoft
Chanos notes that PC sales, particularly desktop PC sales, are falling as users are migrating to mobile computing, including laptops, tablets, and smartphones. The process of declining desktop PC sales has just begun and it could render the PC obsolete. PC sales peaked in 2012 and have begun to trend down this year, while sales of smartphones and tablets have surged. Microsoft Corporation (NASDAQ:MSFT)’s launch of Windows 8, its latest operating system friendlier to touch screens, has not helped bolster PC sales. Users without touch screen monitors expressed dissatisfaction with the default tile interface and the lack of the start menu, a feature that has been a staple of Windows for almost 2 decades. Microsoft Corporation (NASDAQ:MSFT) is planning to launch an update to Windows 8 this year, Windows Blue, which could bring back the start menu and the default traditional desktop interface.
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Such trend calls for price corrections in stocks of companies that provide PC components, such as hard drive manufacturers. According to Chanos, Western Digital Corp. (NASDAQ:WDC) and Seagate have benefited from high prices, so high that they could make about 10 percent of the PC’s sale price. Maintaining such price is unsustainable, as PC makers are operating on thin margins and sales of desktop PCs are declining. Profitability of hard drive manufacturers may also suffer from cost increases, as floods in Thailand may pressure output from production facilities. Companies with diversified electronics businesses like Samsung are exciting the hard drive business. In 2001 Samsung sold its disk drive business to Seagate Technology PLC (NASDAQ:STX).
Chanos also argues that there is digital storage supply excess, as users still have more than enough space in their PCs and mobile devices to store videos and pictures. Server sales have not penetrated the market significantly, and the cloud is making storage more efficient. All these factors translate into lower demand for storage in hard drives and servers.
Jim Chanos Short Ideas: STX Targeted
Other elements that Chanos considers to make a short determination include insider sales and executive turnover. Between October 2011 and 2012, holdings of the four top executives at Seagate Technology PLC (NASDAQ:STX) seem to have declined by about 50 percent. In addition, one of the top three executives left yesterday.